Larry Baer

Luxury tax will impact what Giants do this offseason

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When considering whether to sign an ace like David Price or Zack Greinke to a nine-figure deal, the Giants won’t just consider the number of years they’d be paying a pitcher over 30 years of age, but how their CBT numbers might force the Giants to pay the Competitive Balance Tax (otherwise known as the “luxury tax”) in 2016.

Cot’s Contracts says the Giants’ payroll was $173,179,277 this year. When asked for a payroll number after today’s postmortem press conference, CEO Larry Baer said it was in the $170 million range. The CBT threshold in 2014, 2015 and 2016 is $189 million, but that didn’t prevent the Giants from becoming a taxpaying team in 2015.

“The calculation’s complicated and we actually have been a tax-paying team,” said Baer, who later verified that he was talking about 2015. “Because you put in benefits, you can put in amortized signing bonuses. The way I think about payroll is cash, but that’s not the way the luxury tax is calculated.”

The Giants are currently on the hook for a little over $116 million next season according to Cot’s, but that’s probably about $4 million too low since they have a $1 million figure for Santiago Casilla, whose option vested (he made $5 million in 2015, so if he’s making the same amount in 2016, their obligations are probably a little over $120 million). That doesn’t include arbitration raises for players like Brandon Belt, Brandon Crawford, and George Kontos either, or the $5.5 million Nori Aoki would receive if the Giants pick up his option (Bobby Evans termed the Aoki decision a “close call” today). Their 2016 obligations to players already on the roster probably total over $130 million (and that’s if they buy out Aoki), but their tax number might be a bit lower than that. For now, anyway.

How CBT differs from standard payroll

Most players don’t make the same amount each year, but for CBT purposes, the total amount (including signing bonus and other benefits) is divided by the number of years. So Jake Peavy, who signed for two years and $24 million but made just $9 million in 2015, has a CBT number of $12 million each year. Sergio Romo made $6 million in 2015 and will make $9 million in 2016, so his CBT number will be lower than his cash payout in 2016, like Peavy.

How the competitive balance tax works

The penalty for first-time offenders is 17.5%, and here’s the Giants’ main concern going into this offseason as far as the tax is concerned: those penalties increase to 30% in year two and 40% for teams that go over the tax for three years … in a row. That’s key, because if a team goes back under the CBT threshold a year after paying the tax, the process resets for that team.

For a club like the Dodgers, none of this matters. They’ll just keep paying the tax and the increasing repeater penalties every year. The Giants don’t seem willing to do that, however.

“Let’s say we spent more next year, that doesn’t mean we’d be a taxpaying team next year because of the way it’s all assigned,” Baer said.

So the Giants could have a higher payroll than $173 million next year while staying under the $189 million CBT figure. However, the Giants don’t want to be a tax-repeater, which is probably why when I pressed Baer on whether they’d be a taxpaying team in 2016, he said: “I don’t see us being one.”

The Giants have two holes in the starting rotation (assuming Madison Bumgarner, Jake Peavy and Matt Cain are the only locks, and Cain is an obvious question mark), along with an outfield situation that is currently unsettled. Tax avoidance being such a high priority is partly why I predicted a few weeks back that the Giants wouldn’t go for one of the top aces available in free agency. Not only is this team wary of handing megadeals to starting pitchers from outside the organization, but doing so this winter could force them to pay a 30% penalty unless they get extremely creative with the rest of the roster.

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