The Cubs were very vocal about remaining under the $197 million luxury tax threshold for 2018, but they are already projected to exceed next year’s cap. Adding in MLB Trade Rumors’ arbitration estimates and barring any trades, the Cubs will be about $5 million over the $206 million limit. And that’s without factoring Cole Hamels’ $20 million option.
Those who visit my Cubs financial tracker will see that I maintain future arbitration estimates for all eligible Cubs out to 2022 in an effort to provide some sense of future payrolls. I update my estimates quarterly during the season, as dictated by player performance and I’m happy to report my end-of-year estimates differ by only $300,000 in aggregate from those at MLBTR. Below is a comparison of my estimates and those of the professionals.
Now that my estimates have been supplemented by MLBTR, I can confidently project the Cubs will have $211 million in luxury tax payroll, plus a $20 million option on Cole Hamels. Again, the 2019 luxury cap is $206 million.
The luxury tax (aka Competitive Balance Tax) charges teams a penalty for having payrolls above a preset limit. Additionally, teams lose 10 spots on their top draft pick if they exceed the cap by $40 million in any year. Teams also face escalating surcharges based on several factors. Table 2 below summarizes these factors.
|Table 2: Luxury Tax Penalty System|
|$ over Cap||1st Year Penalty||2nd Yr||3rd Yr|
The 1st, 2nd, and 3rd, year columns refer to how many consecutive years a team has been over the cap. The $ over Cap rows refer to tiers of money. The first $20 million is taxed a lower rate, while larger amounts are taxed at higher rates. Let’s take a look a two examples to further explain.
Example 1: The Cubs (who stayed under the cap in 2018) spend $50 million over the Cap in 2019. As a first-year payer, their tax penalty would be: ($20M * 20%) + ($20M * 32%) + ($10M * 62.5%) = $16.65M.
Example 2: The Cubs then spend $30 million over the cap in 2020. As a second-year payer, the tax penalty would be: ($20M * 30%) + ($10M * 42%) = $22.8M.
If you’re wondering how this information will factor in the Cubs’ pursuit of one or both of the top two players in the upcoming free agent class, fear not. I will discuss the implications this news may have on future Cubs trades and free agent targets in posts over the next few weeks.