I am largely going to cut and paste what is in the MLB.com description (Link) of the new CBT with the 2022 CBA. I am going to add wording in red to be more clear.
Competitive Balance Tax (CBT)
Definition
Each year, clubs that exceed a predetermined payroll threshold are subject to a Competitive Balance Tax -- which is commonly referred to as a "luxury tax." Those who carry payrolls above that threshold are taxed on each dollar above the threshold (ONLY the dollars over the threshold are taxed), with the tax rate increasing based on the number of consecutive years a club has exceeded the threshold.
Astros were under in 2022 so there are no second year penalties that apply.
A team's Competitive Balance Tax figure is determined using the average annual value of each player's contract on the 40-man roster, plus any additional player benefits.
(You can go to the Payroll article to see my projections for the Astros and track how it changes as players are signed.)
Every team's final CBT figure is calculated at the end of each season. (Note: If a player signs a contract extension that doesn't kick in until a later season, his AAV for the purposes of the CBT doesn't change until the new deal begins.)
The following thresholds were put in place per the 2022-26 collective bargaining agreement:
2022: $230 million
2023: $233 million
2024: $237 million
2025: $241 million
2026: $244 million
A club that exceeds the Competitive Balance Tax threshold is subject to an increasing tax rate depending on how many consecutive years it has done so.
First year: 20 percent tax on all overages- This is what applies to the Astros
Second consecutive year: 30 percent
Third consecutive year or more: 50 percent
If a club dips below the luxury tax threshold for a season, the penalty level is reset. So, a club that exceeds the threshold for two straight seasons but then drops below that level would be back at 20 percent the next time it exceeds the threshold.
There’s also a surcharge threshold for clubs that exceed the base threshold by $20 million or more.
For 2023
$253M- $20 million to $40 million: 12 percent surcharge
$273M- $40 million to $60 million: 42.5 percent surcharge for first year; 45 percent for each consecutive year after that
$293M- $60 million or more: 60 percent surcharge
Also Note:
Clubs that are $40 million or more above the threshold shall have their highest selection in the next Rule 4 Draft (the regular draft) moved back 10 places unless the pick falls in the top six. In that case, the team will have its second-highest selection moved back 10 places instead.
Let's illustrate with scenarios
I showed in the Payroll article IF the Astros come to an agreement with Verlander and a few others I think they are at $222M CBT. Let's say they spend
CBT Threshold | Tax Penalty | Draft Penalty | Penalty in 2024 if still at this level |
up to $233M | No Penalty | No Penalty | |
$243M | $2M | No Penalty | $1.8M |
$253M | $4M | No Penalty | $4.8M |
$263M | $7.2M | No Penalty | $8.52M |
$283M | $16.65M | 30th pick back to 40th | $18.9M |
I THINK the Astros are likely to target the 2023 payroll at $238M to $248M. The CBT Tax consequences would be manageable.
Let me know if you have questions.
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