Extensions, the Competitive Balance Tax and Toronto Blue Jays Decisions

One of the issues for MLB and the MLBPA to resolve during the current CBA discussions is the Competitive Balance Tax. What is this tax? How can it affect the timing of contract extensions for key Toronto Blue Jays and other Management decisions?


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Before the lockout, the Toronto Blue Jays signed Kevin Gausman to a 5-year, USD 110 million contract and Yimi Garcia to a 2-year, USD 11 million deal. Many MLB observers expect the free-agent market will heat up soon after a new MLB-MLBPA CBA is in place. However, from a payroll perspective, Toronto may not be as active in the upper end of this free-agent market as some anticipate. Why? Because of the Competitive Balance Tax and future contract extensions and free-agent contracts.

 

In the not-too-distant future, there could be significant contract extensions for Vlad Guerrero Jr. and Bo Bichette and higher-value contracts for soon-to-be free agents such as Teoscar Hernandez and Lourdes Gurriel Jr. Also, other players, including Cavan Biggio, Danny Jansen and Jordan Romano, will be in their arbitration-eligible years. Depending upon how the future unfolds, the Blue Jays could have a payroll that exceeds the Competitive Balance Tax (“CBT”) threshold as early as the 2023 season.

 

This article is Part 1 of a two-part series. Part 1 explains the Competitive Balance Tax and provides contract extension estimates for Guerrero Jr. and Bichette. Part 2 will delve into projections of Blue Jays payroll for the 2022-2026 seasons and how the timing of the Guerrero Jr. and Bichette extensions could impact player decisions made by Management.

What is the CBT?

The CBT, also known as the luxury tax, is payable by a team when the club’s payroll exceeds a previously-determined threshold. In 2021, the base tax rate was 20% and rose depending on how many consecutive seasons the team surpassed the CBT threshold. The CBT has been in place in one form or another since 2002. Many MLB observers expect that the new CBA will include a CBT.

According to MLB’s website, 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. Every team’s final CBT figure is calculated at the end of each season.”

 

For purposes of the CBT, the timing of when the team pays the player does not materially affect the average annual value (“AAV”) of a player’s contract. For example, Max Scherzer’s 7-year, USD 210 million deal with the Nationals mandated that Washington pay the total contract value over 14 years. However, concerning the CBT calculation for Years 1 to 7 of the agreement, the CBT police determined that the present value of the AAV was USD 28.689 million.

 

Regarding the CBT threshold and players acquired during the season, the acquiring team’s CBT payroll reflects the portion of the player’s AAV for the post-acquisition period. For example, consider Player A, who carries a USD 15 million CBT AAV. Two-thirds of the way through the 2021 season, Team X acquires Player A. Accordingly, Team X’s 2021 CBT payroll reflects a USD 5 million AAV charge regarding Player A.

The CBT and postseason success

I looked at the link between teams and CBT payroll rankings for the 2012-2019 and 2021 seasons. I excluded the 2020 campaign because that season was very unusual, including the fact that 16, and not the more typical 12 teams, qualified for the postseason.

 

Table 1 shows that of the 90 postseason teams during the 2012-2019 and 2021 seasons, 24 clubs were in the Top Five in CBT payrolls. However, teams that fell in the 6 to 10 rankings were not too far behind with 18 appearances. Also, 17 clubs in the 11 to 15 CBT payroll slot made the postseason. Concerning World Series Champions, an equal number of teams in the 6 to 15 CBT AAV ranking won the World Series as those in the Top 5.

 

Furthermore, 24 teams exceeded the CBT threshold during the 2012-2019 and 2021 campaigns. Of those clubs, 11 missed the playoffs, and only two won the World Series.

 

In my opinion, surpassing the CBT threshold is not strongly linked to qualifying for the postseason or winning the World Series. Also, the Blue Jays have never been liable for the luxury tax, nor have they publicly expressed a willingness to pay the levy. Therefore, I have assumed that the Blue Jays will construct future payrolls not to exceed the CBT threshold.

Contract extensions

Many MLB onlookers have called upon the Blue Jays to sign Guerrero Jr. and Bichette to contract extensions before they are eligible to become free agents after the 2025 season. For purposes of the analysis to follow, suppose that when the Blue Jays decide to offer fair contract extensions to Guerrero Jr. and Bichette, the players will accept the terms. Of course, the Blue Jays do not have the power to decide when or if an extension is accepted, but let’s assume that the Jays control the timing of new agreements.

 

I have provided five scenarios for consideration, all of which concern when Vlad Jr. and Bo sign their extensions or free-agent deals. The scenarios are as follows:

  • Scenario 1 – Vlad Jr. and Bo sign 12-year extensions before the 2022 season
  • Scenario 2 – Vlad Jr. and Bo sign 11-year contract extensions before the 2023 campaign
  • Scenario 3 – Vlad Jr. and Bo sign 10-year extensions before the 2024 season
  • Scenario 4 – Vlad Jr. and Bo sign 9-year contract extensions before the 2025 season
  • Scenario 5 – Vlad Jr. and Bo sign 8-year free-agent contracts before the 2026 campaign

 

I based the contract extension projections upon the following inputs:

  • Guerrero is a Super Two, which means that he is now arbitration-eligible and will be for four seasons.
  • For consistency, I have assumed that the free-agent contracts for Guerrero and Bichette will be eight years in length. I tacked this eight-year segment onto the contract extensions’ pre-free agency years.
  • Steamer’s 2022 5.8 fWAR projection for Vlad Jr. seemed high to me. Hence, I reduced the figure to 5.3 and held it constant until his age-31 campaign.
  • I used Steamer’s 2022 4.8 fWAR projection for Bo and held that fWAR figure constant until he reaches his age-31 season.
  • Concerning each post-age 30 campaign, I applied the standard age-decline factor (minus 0.5) to the previous season’s fWAR.

 

An essential element of a contract extension is determining the likely arbitration award for the relevant season. Kevin Creagh wrote an article on arbitration awards. He found that the average arbitration amount depends on the estimated AAV of the next free-agent contract signed by the player. For a Super Two, the arbitration awards concerning Arb Years 1, 2, 3 and 4 are 21%, 33%, 50% and 69% of the free-agent deal’s AAV. Regarding a player with three arbitration years, the percentages are 25%, 40% and 60% of the free-agent contract’s AAV.

The numbers

I arbitrarily applied discount rates to each scenario: the longer the deal, the higher the discount. I reason that Vlad Jr. and Bo would accept less risk (performance and injury) for a lower contract value. Therefore, the discount rates are as follows:

  • Scenario 1 – 16%
  • Scenario 2 – 8%
  • Scenario 3 – 4%
  • Scenario 4 – 2%
  • Scenario 5 – 0%

 

Table 2 is an example of Guerrero Jr.’s contract extension calculation. For Bichette, one can find his 12-year extension in Table 3. The contract details are as follows:

  • Scenario 1 – Vlad Jr. signs a 12-year, USD 302.4 million deal; Bo’s contract is USD 237.6 million.
  • Scenario 2 – Vlad Jr. signs an 11-year, USD 324.5 million deal; Bo’s contract is USD 260.7 million.
  • Scenario 3 – Vlad Jr. signs a 10-year, USD 328.0 million deal; Bo’s contract is USD 263.0 million.
  • Scenario 4 – Vlad Jr. signs a 9-year, USD 316.8 million deal; Bo’s contract is USD 256.5 million.
  • Scenario 5 – Vlad Jr. signs an 8-year, USD 296.1 million deal; Bo’s contract is USD 244.0 million.

 

Vlad Jr.’s contract value is higher than Bo’s in all scenarios because of three factors. First, Vlad’s starting fWAR (5.3) is higher than Bo’s. Second, Bo’s estimated arbitration awards are less than Vlad Jr.’s because Bo’s free-agent deal’s AAV is less than Vlad’s. Also, Vlad is a Super Two and thereby has an additional year of arbitration eligibility. Third, Bo is one year older than Vlad Jr. and, accordingly, Bo has one more season subject to the age-decline factor.

 

It is essential to acknowledge that these contract estimates are just that, estimates. The projections will probably differ from the actual numbers. However, the critical takeaway is that Vlad Jr.’s and Bo’s future compensation will significantly impact Blue Jays’ payroll and proximity to CBT thresholds. Table 4 summarizes Vlad Jr.’s and Bo’s future AAVs’ collective impact under the scenarios presented.

 

Part 2 of this series will focus on the Blue Jays payroll for the 2022-2026 seasons. The data in Table 4 demonstrates that the timing of the Vlad Jr. and Bo contract extensions will impact both payroll and Toronto’s vicinity to the CBT threshold. Also, I will examine how the Guerrero Jr. and Bichette extensions could impact player decisions made by Management.

The last word

The Toronto Blue Jays will likely reward the excellence of Vlad Jr. and Bo with large, multi-year contracts. Those deals will impact the Jays’ payroll and proximity to the CBT threshold. Therefore, the magnitude and timing of those contracts will affect Management’s player decisions.

 

 

 

*Featured Image Courtesy Of DaveMe Images. Prints Available For Purchase.

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Bob Ritchie

Bob was a St. Louis Cardinals fan until the Blue Jays arrived on the baseball scene, although he still has a soft spot for the Cards. Similar to straddling the Greenwich Meridian, as depicted in the avatar, Bob applies sabermetrics when applicable, but his heart tells him that Lou Brock belongs in the Hall of Fame.