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MLB trade deadline: Tigers' deals help Detroit avoid paying luxury tax

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The Detroit Tigers will save about $12 million in salaries as a result of recent trades, helping them to avoid paying a luxury tax in 2015.

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The Detroit Tigers will save over $12 million in salaries for David Price, Yoenis Cespedes, and Joakim Soria for the remainder of the 2015 as a result of the trades completed just prior to the July 31st trade deadline. Prior to trading the three players, the Tigers were likely headed toward paying a competitive balance tax, more commonly called a "luxury tax" for the 2015 season. After the three trades, the club will not have to pay a tax in 2015, and any tax paid in 2016 would be almost cut in half.

Under the terms of Major League Baseball’s current collective bargaining agreement (CBA), Detroit would pay a 17 percent tax on every dollar that exceeds a total payroll above $189 million for their 40 man roster during the 2015 season. That number includes about $11.66 million for each team’s share of player benefits, leaving teams with about $177.34 million to spend on player salaries. The $12 million in payroll savings will bring the Tigers under the threshold that would trigger the payment of a luxury tax, which is calculated by December 2nd each year for the preceding season.

The Tigers had an Opening Day payroll of $172,792,250 according to Cot’s contracts, just for their 25-man roster. When using the average annual value of players signed to multi-year contracts, that number increases by $5.6 million, mainly due to Miguel Cabrera’s contract extension, which kicks in for the 2016 season and beyond. That brings the Tigers’ 2015 payroll to $178,392,250 for tax purposes, which exceeds the tax threshold by about $1 million when benefits are added in.

There are other costs that have to be included. Fifteen players on the 40-man roster are not included in Cot's Opening Day payroll, which adds about $1.2 million in minor league salaries. There are performance bonuses, such as Cabrera's $ 100,000 bonus for making the all star team. Players are called up to replace a player who goes on the disabled list. Players were called up to replace the guaranteed contracts given to Joba Chamberlain and Tom Gorzelanny. More players will be called up when rosters expand in September. Each player added will receive at least the major league minimum of $507,500, prorated for the time that they are in the major leagues. These salaries add $1.5 to $2.5 million to the payroll for tax purposes.

The $12 million in savings, less the cost of replacing the traded players for the remainder of the season will bring the Tigers’ payroll comfortably under the tax threshold for 2015, by about $8 million.

The club narrowly avoided paying a tax in 2014, with a payroll just over $187 million for tax purposes. Had the Tigers exceeded the 2015 tax threshold, that in itself may not have been such a big deal. They did so in 2008 and had to pay a tax of about $1 million. A 17 percent penalty on a $5 million would be $850,000.

However, if the team were to exceed the threshold for a second consecutive season in 2016, the luxury tax jumps to 30 percent on every dollar spent above the limit. The tax reaches 50 percent for teams that are habitually over the limit, such as the New York Yankees and the Los Angeles Dodgers.

Tigers owner Mike Ilitch was probably not very concerned about paying a tax if it meant making the playoffs in 2015, but paying a 30 percent tax next season could have been a deterrent to spending more money when assembling a contending team in 2016.

The Tigers have $65 million coming off the payroll due to expiring contracts for free agent players, including those traded or released during the season. They will have an increase of $8 million in payroll due to salary increases in multi-year contracts, plus about $5 million due to arbitration increases. Finally, they will begin paying $6 million in salary for Prince Fielder, who now plays for the Texas Rangers. That leaves a net payroll that is some $46 million lower than the Opening Day total for 2015, though the roster is far from finalized. It's going to be a busy offseason for the Tigers.