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New MLB collective bargaining agreement has consequences for the Tigers

Changes in draft pick compensation and a higher tax bracket loom large for this Tigers team.

Los Angeles Angels of Anaheim v Detroit Tigers Photo by Leon Halip/Getty Images

The Detroit Tigers did not fare as well as other clubs in the latest round of collective bargaining between Major League Baseball’s players and owners. While the club continues to share in the game’s soaring revenues, the adjustments that were made to the luxury tax structure and free agent compensation rules do not favor the Tigers’ efforts to remain competitive on the field in the near future.

Competitive balance tax

The Tigers stood to benefit from an increase in the “competitive balance” tax threshold, which stood at $189 million for the past three seasons. The new collective bargaining agreement (CBA) only saw a modest increase in that tax threshold, to $195 million. That represents just a 3.1 percent increase, while MLB revenues have been increasing at a rate of 5.5 percent per year. As a second time “offender,” the Tigers will pay a 30 percent tax on every dollar spent on player salaries and benefits above the new threshold. They would have paid that under the old CBA as well. Increases in the minimum salary and contributions to player benefits will eat into the small increase in the threshold.

The Tigers would take an even bigger tax hit if their payroll tops the $215 million mark. This is because they would then be subject to a new payroll surtax on the overage between $215 million and $235 million. The Tigers’ payroll is currently around $212.5 million when factoring in the average annual value of contracts, player benefits and arbitration increases. It won’t take much movement during the season to push them into another tax bracket. Even just a few players on the disabled list who must be replaced by other players, and some September call-ups would do it.

The surtax between $20 million and $40 million above the naughty limit is 12 percent. But according to the Los Angeles Times, only half of that (six percent) is phased in the first year of the new CBA. To put it another way, if Cameron Maybin had his option picked up at $9 million for the 2017 season, the bulk of that salary would have been subjected to a tax of 30 percent, plus an additional six percent, for a net tax of 36 percent. The same would apply to any significant salary added to the current payroll.

Should the Tigers’ payroll remain over the $197 million mark in 2018, they will be subject to a 50 percent tax on the overage, plus a 12 percent surtax — or 62 percent — on the amount above $217 million.

Free agent compensation

Another term in the new CBA that threatens Detroit is the compensation that is paid to teams who lose a free agent player after making a qualifying offer. If the player signs with another club for more than $50 million, the former club will receive a supplemental first round draft pick, but only if they are under the tax threshold. If not, they receive a supplemental fourth round pick instead. The Tigers’ position relative to the tax threshold is important as J.D. Martinez approaches free agency after the 2017 season.

In addition, the new CBA provides that free agents may not receive a qualifying offer more than once in their careers. So, if Justin Upton were to opt out of his contract after the 2017 season, the Tigers could not make a qualifying offer, and would therefore receive no compensation for losing him. They previously could have received a first round draft pick — if they were under the tax threshold.

What do the Tigers need to do?

Detroit is a mid-market team, earning revenues right about at the median among all major league clubs. They have tried to compete with teams that have more revenue and high payrolls as owner Mike Ilitch pushes for a World Series title. Recently, they have made the decision to try and compete with a payroll more in line with their market size. In other words, they want to get under the tax threshold. That should not be a problem in 2018 and after, but 2017 is challenging.

The Tigers would need to reduce their payroll by about $20 million to get under the new tax threshold, allowing for a bit of wiggle room for in season moves. The salaries of Anibal Sanchez, Mark Lowe, and Mike Pelfrey together total $29.5 million. The Tigers would like to unload as much of that as possible. Whether they can find $20 million in savings while remaining competitive during the 2017 season is problematic.

All teams and players benefit from the fact that there will be no stoppage in play, so the fact that there is an agreement is good for everyone. But the changes to the rules will benefit some clubs more than others. Sadly, the Tigers are not one of those more fortunate teams.