Pirates Business: Competitive Balance Tax Changes

Pirates Business: Competitive Balance Tax Changes

For as downtrodden and destitute as Major League Baseball franchises would like you to believe they are, a lot of money has been committed in free agency this offseason.

A lot a lot, like $3.8 billion a lot, and rising—I’m watching and hoping it reaches $4 billion, even if that’s probably a stretch, as we’ve reached the downslope as far as signings go.

No team has committed as much as the New York Mets—$807,166,666 million to 10 players—with their AL counterpart, the Yankees, second at $573,500,000.

The Mets were second, until some questionable medicals caused an agreement between Carlos Correa and the San Francisco Giants to go sideways, with the Mets swooping in to procure Correa’s services. The agreement has yet to become official, with more medical concerns possible, but for now, the team is reaching heights never before seen as far as payrolls go.

Estimates will vary, but best I can tell, Christopher Soto of Metsmerized is the go-to source for the best available Mets’ figures (a scroll through Christopher’s Twitter account is eerily similar to what you’ll find in mine, and I love it).

Currently, Soto has the Mets at a Competitive Balance Tax figure of $378,755,907, well beyond the $233 million tax line for 2023. Per Soto’s calculations, this would result in $106,580,316 worth of CBT penalties.

Of course, these numbers are just theoretical at the moment, but they have been causing a stir in the baseball world, as discussions will always pick up when teams spend this way.

The biggest topic of discussion is largely the tax bill—one that is more than the estimated payrolls for several teams, the Pittsburgh Pirates included. I’m not here today to talk about whether that’s right or wrong—though I’m not sure how fans have become so disillusioned by greedy owners that they think actually spending money on players is somehow wrong—rather, I want to examine what happens with that tax income, whatever it ends up being.

As part of these often-heated discussions around high spending, a common refrain I’ve seen is that the Pirates get to sit back and collect more money as the Mets payroll continues to climb.

While that may have been the case before, is it still?

As best I can tell, starting in 2017, teams who did not exceed the Competitive Balance Tax received a share of the proceeds from those who did—50% of the remaining total after $13 million went to defraying the costs of player benefit plan obligations. Doing some quick math, under that system, the Pirates would have received roughly $3.9 million from just the Mets’ penalties alone. Of course, this isn’t anything hard and fast, as it only includes the proceeds from one team and assumes the same number of teams over the tax in 2023 (six) as projected after 2022. It’s at least a good reference point for the discussion though.

As I’ve alluded to, however, change seems to be afoot.

Looking back through my hundreds of pages of notes from these past CBA negotiations, I found at least a few references to changes to the Competitive Balance Tax system:

Well, those vague allusions were all we had until recently, when Evan Drellich of The Athletic dropped these tidbits of information on Twitter:

If for some reason this isn’t clear, in layman’s terms, this is saying that the system from 2017-2021 has changed—teams no longer get to sit back and collect Competitive Balance Tax proceeds; they have to work for them. Payments will only be made from the Discretionary Fund to Revenue Sharing Payees attempting and succeeding in efforts to increase their Net Local Revenue by meeting certain benchmarks, as laid out above.

One of players’ biggest tenants in these past negotiations was incentivizing competition, proclaiming at the time that “[w]e continue to see Clubs openly choosing a model of sustained losing while still reaping economic benefit”. As you can see above, the new application of funds is “[i]n furtherance with the MLBPA’s efforts to incentivize Clubs to grow local revenue by providing a competitive on-field product” while “eliminat[ing] one of the previous incentives to stay below the CBT base threshold”.

I’ll circle back to the former, but the latter is an interesting wrinkle. Free agent spending had slowed way down in recent years, with teams weary of crossing the tax thresholds. While not a main reason, it’s at least plausible that teams saw the value in not exceeding the threshold and receiving a small sliver from those who did.

Six teams are believed to be Competitive Balance Tax payors after 2022, with only two crossing those lines after 2021. Six more teams are currently projected to be over for 2023, with one other pushing up against the line. Whether this new wrinkle had any influence on these changes in behavior or not, it’s unquestionably a good thing seeing teams spending on players and trying to win, and it appears that the new rule isn’t impeding that in any way, at least for now.

As for clubs “reaping economic benefit” while continuing to lose, this new rule, while small, is an important win for the players nonetheless. Yes, changes to the Revenue Sharing model and how clubs are forced to use those funds would have been far more substantial—as the funds themselves are far more substantial—it again is unquestionably a good thing that clubs need to actually try in order to receive the tax proceeds. Efforts to reduce Revenue Sharing received, increasing revenue despite market size, increasing attendance and fan engagement, and simply trying to win: these are all efforts fans claim to want from their teams and efforts that should be made by all teams, no matter the reward.

It’s unfortunate that they need incentivized, but it’s better than nothing. When the Pirates or any other team that’s not trying fail to see this small, passive income stream in the future, it’ll be due to this new rule.

Offseason Calendar Update

No updates here as of this week.

Pirates Payroll Updates

—As promised by Ben Cherington, the team agreed with another starter to round out the rotation, settling with Rich Hill on a one-year, $8 million contract.

A career journeyman of sorts, I count Hill at 13.124 years of service, surpassing Carlos Santana for most on the team.

To make room in my projection, I designated Yohan Ramirez for assignment and optioned Johan Oviedo. As a result, payroll went up $7,263,666.

This firmly puts the team in a position where they should exceed both last year’s starting ($60,114,300) and ending ($60,925,548) payrolls.

—For 2023, the payroll estimate stands at $68,282,197 for the Labor Relations Department, while it’s $84,698,864 for CBT purposes.


Pirates Business: Competitive Balance Tax Changes

A longtime Pirates Prospects reader, Ethan has been covering payroll, transactions, and rules in-depth since 2018 and dabbling in these topics for as long as he can remember. He started writing about the Pirates at The Point of Pittsburgh before moving over to Pirates Prospects at the start of the 2019 season.

Always a lover of numbers and finding an answer, Ethan much prefers diving into these topics over what’s actually happening on the field. These under and often incorrectly covered topics are truly his passion, and he does his best to educate fans on subjects they may not always understand, but are important nonetheless.

When he’s not updating his beloved spreadsheets, Ethan works full-time as an accountant, while being a dad to two young daughters and watching too many movies and TV shows at night.


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