Tigers likely to pay luxury tax in 2015 and 2016

After settling their three largest arbitration cases, including a record $19.75 million contract for David Price, the Detroit Tigers have a projected payroll topping $172 million for the 2015 season, and are likely to pay a luxury tax on their payroll in 2015 and in 2016.

The total of the three settlements with Price, J.D. Martinez, and Alfredo Simon add up to $1.4 million above projections. Add another $1 million for pitcher Tom Gorzelanny, and the club is committed to $164 million in player salaries for just 14 players for the 2015 season. Figure in salaries for Al Alburquerque and Jose Iglesias, then fill out the roster with nine more players earning close to the major league minimum, and the Tigers are projected at about $172 million.

The average annual value (AAV) of players under multi-year contracts is used when calculating the payroll for luxury tax purposes. Major League Baseball uses AAV rather than the player's salary for the current season. So, Miguel Cabrera will earn a salary of $22 million for 2015, but for tax purposes, he has an AAV of $29.2 million. Conversely, Yoenis Cespedes will earn a $10.5 million salary, but carries an AAV of $9 million.

The AAV of the 14 signed players, plus a projected $1.7 million for Alburquerque, who has yet to settle his arbitration case, and $1.65 million for Jose Iglesias, adds up to $167.35 million. Filling out the 25 man roster with players earning the major league minimum, which is $507,500 for next season, brings the payroll up to $177.5 million.

Player benefits also have to be included in the calculations for tax purposes. According to Maury Brown at Forbes.com, each club’s share of benefits was $11,656,837 per club for the 2014 season. If you’re still keeping score, that pushes the Tigers’ payroll up over $189.1 million, which would trigger a luxury tax at the rate of 17.5 percent on every additional dollar spent on player salaries. But wait, there’s more.

Al Alburquerque’s salary is projected at $1.7 million. He requested $2.05 million and the club offered $1.375 million. The midpoint is just above the projection, but the Tigers have a history of settling arbitration cases for a bit more than the projections. The actual salary may vary.

Jose Iglesias earned a salary of $1.65 million in 2014, and he is not yet eligible for arbitration. The club can automatically renew his contract at a salary that is at least 80 percent of his previous year’s salary. The minimum would be $1.32 million. Considering he missed all of 2014 on the disabled list, but still accrued a year of service time that will make him eligible for arbitration in 2016, the club may feel justified in reducing salary for 2015. At most, they could save about $330,000 at the risk of having a slightly disgruntled shortstop.

Players earning the major league minimum salary stand to receive at least $507,500 for the 2015 season. That is a 1.5 percent increase over the $500,000 minimum salary for 2015, thanks to a cost of living increase. Some of those players will earn just a bit more than the minimum. The Tigers agreed to pay $48,000 to seven players who were guaranteed the minimum salary in 2014. Players such as Nick Castellanos and Anthony Gose, whom the Tigers are counting on to contribute on a daily basis, will likely receive a bit extra in their paychecks.

All players on the 40 man roster are included in the team’s payroll for purposes of calculating the luxury tax. That will be another fifteen players who are on the 40 man roster, but not on the 25 man roster. The minimum salary for a player who was either on the 40 man roster previously or has at least one day of major league service time, is $82,500. The two players who are on their first major league contract and have no service time will receive at least $41,500.  That will add another $1.155 million to the payroll for tax purposes.

Players on the major league disabled list will be paid their major league salary, even though they’re not eligible to play. A player who is called up to replace them, earning the major league minimum, will add that much to the payroll, and the baseball tax man is still keeping score.

Players who are called up from the minor leagues in September will earn a prorated major league salary for the time spent in the major leagues. The difference between their major league salary and minor league salary comes to about $71,000 if they are up for the full month. There are normally half a dozen or so players called up at the end of each season. Add another half a million dollars.

Joel Hanrahan was signed to a minor league contract that will pay him $1 million if he is called up to the major leagues, and up to $2.5 million in performance bonuses.

What all of this means is that it is going to be very difficult for the Tigers to avoid paying a luxury tax without making some moves to reduce their payroll before the end of the 2015 season. The only way that could happen is if the team is out of the pennant race before the trade deadline at the end of July. More likely, the club will want to add players who increase the payroll to help them contend, rather than reducing payroll because of the luxury tax.

What about 2016?  The good news is that the Tigers will have $64.2 million coming off the books after the 2015 season. Their arbitration list is relatively small, with just J.D. Martinez, Alburquerque, and Jose Iglesias due for any significant salary increases. The bad news is that they will be losing two starting pitchers, including Price, as well as their starting catcher, two outfielders, and three relief pitchers including their closer and main setup man.

The club might be able to perform a balancing act and get through the 2015 season paying just a relatively small amount in luxury taxes at the 17.5 percent rate. However, the fact that they trigger a tax at all is as significant as how much tax they have to pay, because the penalty jumps to 30 percent if they should exceed the limit for two consecutive seasons.

If the club plans on contending in 2016, they’re going to need to retain the services of either David Price or a comparable starting pitcher. In no version of reality can they lose Max Scherzer, Doug Fister, Rick Porcello, and Drew Smyly as well as Price, and still contend. If you figure that a comparable ace will cost at least $25 million in 2016, and add another $7 million for arbitration increases, there’s not much left to replace the departing free agents. It would seem, then, that the club is very likely to be in the 30 percent tax bracket for the 2016 season if they plan on being contenders.