For the first time since the Philadelphia Phillies fired former manager Gabe Kapler last October, club president Andy MacPhail spoke to the collective media Friday afternoon in Clearwater.
The topic at the forefront of everyone’s mind? The $208 million luxury tax threshold that the Phillies are close to exceeding.
MacPhail, who is entering his fifth season in his current role, says that while the Phillies may very well end up exceeding the luxury tax threshold at some point in 2020, it’s not something that they want to make a habit of.
“Speaking for the Phillies and their ownership, we’re not reluctant to go over it,” MacPhail told the assembled media Friday. “It is not an impenetrable barrier by any stretch. It’s my hope, and frankly, my expectation that we are going to go over it this year. But nobody can live over it. The penalties are too severe, not just economically, but it grabs you every different way…your draft choices get diluted…coming and going…if you were to lose a qualified free agent your draft choices get diluted…you sign guys, that’s additional draft picks…they take away your international money. Every team that’s been over that for a couple years in a row – New York, Los Angeles, Boston – you have to reset as a practical matter.”
In January, Phillies Nation‘s Jonny Heller estimated that the Phillies have at most $6.9 million before reaching the luxury tax threshold, a number that’s probably slightly lower after Tommy Hunter was re-signed for $850,000. If the Phillies lose their upcoming arbitration cases against J.T. Realmuto and Hector Neris, that would leave them with around $3.5 million in room under the collective balance tax. MacPhail also pointed out Monday that some of the Phillies non-roster invitees to Spring Training could make the Opening Day roster, increasing the amount of money they are due to make in 2020 and further limiting the amount below the tax threshold.
Here’s a reminder of what would happen if the Phillies exceeded the tax in 2020, and for that matter, 2021:
“A club exceeding the Competitive Balance Tax threshold for the first time must pay a 20 percent tax on all overages. A club exceeding the threshold for a second consecutive season will see that figure rise to 30 percent, and three or more straight seasons of exceeding the threshold comes with a 50 percent luxury tax. 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.”
From a strictly financial sense, the Phillies could probably afford to go over every year. Let’s say that the Phillies go over the luxury tax for the next three seasons. In 2022, if they exceeded the tax by $10 million – which is probably more than they would go over it by – that would leave them to pay $5 million. That’s doable.
If the Phillies exceeded the tax by $20-$40 million, they would be “subject to a 12 percent surtax.” Issues draft wise would really begin if they exceeded the luxury tax threshold by more than $40 million:
“Meanwhile, those who exceed it by more than $40 million are taxed at a 42.5 percent rate the first time and a 45 percent rate if they exceed it by more than $40 million again the following year(s).
Beginning in 2018, clubs that are $40 million or more above the threshold shall have their highest selection in the next Rule 4 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.”
Whether the Phillies have consistently hit on high draft picks in the last 15 years or not, the draft – and other penalties that MacPhail mentioned regarding international bonus pool money and qualifying offer return – is worth keeping in mind. You can’t build a team entirely out of free agents unless you are willing to blow by the luxury tax threshold, which there’s no indication that the Phillies or any other team in the sport is willing to do.
Here’s the thing, though – even in the wildest scenario where the Phillies acquire Kris Bryant and his $18.6 million salary from the Chicago Cubs, they wouldn’t even be $20 million over the threshold, let alone $40. Sure, Realmuto is likely to get more expensive in 2021 and Odubel Herrera is still under contract for $10 million, but Jake Arrieta and David Robertson – who are making $31 million combined in 2020 – are set to come off the books.
You do want to maintain financial flexibility. Part of that is going to involve building a pipeline of consistent starters ready to come to the major league level and provide cheap production. Even with Alec Bohm and Spencer Howard on the horizon, the Phillies don’t have that right now. So their best chance to compete in a division with three other teams that have World Series aspirations is to use their financial wherewithal, hoping that by the time they would be anywhere near luxury tax ramifications that go beyond dollars, they wouldn’t need to be as reliant on spending large swaths of money on veterans. Truth be told, you should be able to stay slightly under the tax and be sure that you have a playoff-caliber roster. The Phillies aren’t there right now, though.
At the somewhat infamous press conference where the Phillies announced the firing of Kapler, Phillies managing partner John Middleton didn’t say that the Phillies wouldn’t go over the tax, but cast doubt about whether they would be willing to do so if it was only for a shot at the second Wild Card spot.
Friday, MacPhail seemed to think that the Phillies would be willing to go over the luxury tax threshold for any chance to return to the postseason for the first time since 2011. Again, though, he preached that he believes it’s not sustainable to do that annually.
“Well, I would trade the CBT for the Wild Card spot,” MacPhail said with a chuckle. “I don’t wanna get in trouble with John, but I would. But the problem is, what’s going to happen the next year? And the year after that? What extensions and other free agents are you going to want to sign? Is this a never-ending trail upwards where you can’t get out of it and then you get in the position where you are obligated to reset? That’s a pretty draconian, dramatic thing to do to your fanbase. So, yeah, I think you need to be protective and careful, and like I said, don’t go over it cavalierly. But if you have the opportunity to win, that’s not going to prevent us from going over, ownership has made that clear.”
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