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Squeeze play: How does the luxury tax affect the Tigers' 2015 payroll?

The Detroit Tigers’ payroll leaves little room for roster improvements without paying a luxury tax or clearing salaries off the books. Here is how the tax works, with a complete breakdown of the payroll numbers.

Tommy Gilligan-USA TODAY Sports

Using the total average annual value of the contracts for players on their 25 man roster, the Detroit Tigers have a projected payroll of about $175 million. Should payroll exceed $178.4 million for the 40 man roster for the 2015 season, the club would be hit with a 17.5 percent tax on the overage. The tax could jump to 30 percent on the excess for the 2016 season if payroll exceeds the threshold in consecutive years.

We’ve talked about the Tigers’ payroll, the luxury tax, and the club’s conservative roster moves so far this offseason, once they extended Victor Martinez and picked up the option on Joakim Soria. This is all in the context of a payroll that is currently projected to be the third highest in Major League Baseball for the 2015 season, behind only the Los Angeles Dodgers and the New York Yankees.

Payroll projections are based on the salaries of players under contract, plus estimates for those eligible for arbitration, plus the major league minimum salary for enough players to fill out the 25 man roster. Another 15 players on optional assignment complete the 40 man roster, although minor league salaries won’t have a significant impact on the overall payroll.

The competitive balance tax is triggered at $189 million, minus the $10.6 million that each club contributes to player benefits for the season, leaving $178.4 million to spend on salaries for the 40 man roster. For tax purposes, the average annual salary (AAV) is used for players under multi-year contracts. This means, for example, that Miguel Cabrera’s average annual value is counted as $29.2 million for each season, rather than the $22 million that he will actually be paid in 2015.

The tax is 17.5 percent of the amount above the tax threshold in the first season that a team goes over the limit. In the second consecutive year, the tax is 30 percent. The tax is 40 percent in the third year and 50 percent every year thereafter. The Yankees have paid a luxury tax in every season since 2003.

Even if the Tigers aren’t concerned about the tax in 2015, the impact of crossing the line could have more severe implications for the 2016 season, should they try to extend or replace key free agent players. There is a sunset provision in the collective bargaining agreement (CBA) which means there will be no tax after the 2016 season.

We won’t get into the payroll implications any further in this article. The purpose here is to break down exactly how the luxury tax works, and where the Tigers’ payroll stands, providing the financial context in which this winter’s roster moves are being made.

Players with guaranteed contracts
Player 2014 2015 2016 2015 AAV
Miguel Cabrera 22.0 M 22.0 M 28.0 M 29.2 M
Justin Verlander 20.0 M 28.0 M 28.0 M 25.7 M
Victor Martinez 12.0 M 14.0 M 18.0 M 17.0 M
Anibal Sanchez 15.8 M 16.8 M 16.8 M 16.0 M (c)
Ian Kinsler 16.0 M 16.0 M 14.0 M 16.0 M
Joe Nathan 9.0 M 10.0 M FA 1.0 (b) 10.0 M
Rajai Davis 5.0 M 5.0 M F A 5.0 M
Joakim Soria 1.85 M (a) 7.0 M F A 7.0 M
Alex Avila 4.15 M 5.4 M F A 5.4 M
Total 105.8 M 124.2 M 104.8 M 131.3 M

(a) Soria's $ 5.5 M 2014 salary is pro rated for time with Detroit
(b) Nathan's 2016 option is $ 10 M. $ 1.0 M buyout is included in 2015 AAV
(c) Sanchez 4.0 M bonus is spread over 5 year contract

Arbitration eligible players
Player Service Year Eligible 2014 Salary * 2015 Projection Increase/Decrease
David Price 5.170 4th 14.0M $ 18.9M +4.6M
Rick Porcello 5.164 4th 8.5 12.2 +3,7
Al Alburquerque 3.147 2nd 0.875 1.7 +0.825
J.D. Martinez 3.036 1st 0.510 2.9 +2.39
Total - - 23.9 35.7 +11.5

*Arbitration estimates based on MLB Trade Rumors projections.

Payroll summary
Status 2015 Salary 2015 AAV 2016 Salary
Players under contract (9) $ 124.2 million $ 131.3 million $ 104.5 million
Arb eligible (4) $ 35.7 million $ 35.7 millioni TBD (c)
Jose Iglesias (a) $ 1.65 million 1.65 million TBD
Pre-Arb Eligible (11) $ 5.61 million (b) $ 5.61 million TBD
Total $ 167.16 million $ 174.26 million $ 111.8 million

(a) Jose Iglesias is projected to earn the same salary as 2014. The club can voluntarily increase, or reduce by up to 20 percent.
(b) Other pre arbitration eligible players are projected at $510,000 salary.
(c) Arbitration eligible players in 2016 may include J.D. Martinez, Alburquerque, Iglesias, Andrew Romine, and Luke Putkonen.

2016 total includes guaranteed contracts, plus $6 million payment for Prince Fielder.