Near the end of a 2019 news conference to announce that Gabe Kapler would no longer manage the Phillies, John Middleton defined the team’s relationship to the luxury tax.
“My view is that you go over the luxury tax when you’re fighting for the World Series,” the Phillies owner and managing partner said then. “If you have to sign Cliff Lee and that puts you over the tax, you do it. If you have to trade for Roy Halladay and sign him to an extension and that puts you over the tax, you do it. But you don’t do it for a little gain.”
The Phillies were more than one player away from being a World Series contender in 2019, 2020, and 2021. So although Middleton authorized one of the highest payrolls in the sport, his front office treated the luxury-tax threshold like a limbo stick, getting as close as possible before contorting to stay beneath it.
How close? In 2021, the Phillies came within $629,000 — roughly the salary of a player who was making the major-league minimum — of the $210 million tax bar, according to information provided to teams by the commissioner’s office and obtained two weeks ago by the Associated Press.
It wasn’t only the Phillies. The Yankees, Mets, Red Sox, and Astros each got to at least $206 million and applied the brakes. Only the Dodgers ($285.6 million) and Padres ($216.5 million) spent beyond the threshold in 2021, costing them $32.65 million and $1.29 million, respectively, in tax penalties. Compare that with 2017, the first year of the recently expired collective bargaining agreement, when five teams paid the tax.
Baseball doesn’t have a salary cap, a longstanding point of pride for players. But 22 teams, including the Phillies, have never crossed into tax territory since the existing surcharge system was put in place in 2002. And after witnessing increased resistance to surpassing the threshold, the leadership of the players’ union concluded that many teams have come to “view it as a cap,” as Mets co-ace and high-ranking union member Max Scherzer said last month.
It’s little wonder, then, amid an owner-imposed lockout that has caused MLB to go dark for more than a month and counting, that the luxury tax is among the biggest issues in the dormant bargaining talks. It also may be the issue that shapes how the Phillies will approach the second half of the offseason, whenever it begins
There’s no chance the players will succeed in getting rid of the luxury tax. But they are expected to fight for the threshold to be raised. When the most recent CBA took effect in 2017, the threshold was $195 million. It inched to $197 million in 2018, $206 million in 2019, $208 million in 2020, and finally, $210 million, an average annual increase of 1.88%.
Before negotiations were halted last month, the owners reportedly offered to raise the luxury-tax threshold to $214 million, a 1.9% increase over 2021. The players’ proposal reportedly included a $245 million threshold, a 16.67% hike from last year. It’s unclear whether either side will dig in on this particular issue, or if they can reach a compromise.
The parties must also agree on a set of penalties. Under the most recent CBA, a team that spent up to $20 million over the threshold for the first time paid a 20% tax, a punishment that Scherzer labeled “pretty negligible.” But teams were taxed at a higher rate if they went more than $20 million beyond the threshold. And the rates increased again for teams that went over the threshold in consecutive years, topping out at 95% in the third year. Teams also ran the risk of being docked draft picks, international amateur bonus pool money, or revenue-sharing dollars.
“There’s a reason why they call it a tax,” Phillies president of baseball operations Dave Dombrowski said in October. “Because it’s punitive and you don’t want to get penalized.”
The Red Sox were taxed in three of the four full seasons in which Dombrowski ran their baseball operations, including 2018, when they won the World Series. Boston owner John Henry decided, likely after being persuaded by Dombrowski, that the time was right in the organization’s competitive cycle to be aggressive with the tax.
A case could be made that the Phillies are in that predicament. Bryce Harper, Zack Wheeler, J.T. Realmuto, Aaron Nola, and Rhys Hoskins are at their peaks and locked up through at least 2023. The Phillies haven’t made the playoffs in 10 years, the longest active drought in the NL. And they have holes in left field, center field, the bullpen, and the back of the rotation.
Harper, of all people, cautioned against “buying and buying and buying” and stressed the need to add homegrown talent. But few prospects at the upper levels of the farm system have ripened in the last few years, a problem that won’t be fixed in one offseason. Dombrowski will be hard-pressed to address every positional need and still stay below the tax threshold — unless the threshold goes way up in the new CBA.
The Phillies went into the lockout with roughly $183 million in luxury-tax commitments. If the threshold rises to, say, $230 million and Middleton maintains his policy of marching to the limit without surpassing it, Dombrowski should be able to buy a free-agent slugger to bat behind Harper and address other needs.
But another 2% increase would leave Middleton, who memorably said in that 2019 news conference that he’s “not a potted plant sitting in the corner,” to decide whether it’s time to blow past the threshold regardless of the penalties in place, a la his Mets counterpart Steve Cohen, the wealthiest of baseball’s billionaire owner class.
Dombrowski said in November that Middleton gave him an offseason budget. He predictably declined to disclose it but sounded satisfied with the resources at his disposal.
“I don’t find it restrictive,” Dombrowski said. “Put it that way.”
Really, though, the exact terms of that budget are in a deep freeze, like everything else in baseball during a lockout. Wait for the thaw.