by The Padres were known to have had a spirited run in aaron judge between his search for Trea Turner and eventual agreement with Xander Bogarts. USA Today’s Bob Nightengale suggested this week that the friars were prepared to submit an offer of around $400 million (Twitter link). The Athletic’s Ken Rosenthal wrote that they never formally made such an offer, but it is clear that the San Diego front office had at least contemplated a proposal that would have exceeded offers made by both the Giants and Yankees.
The New York Post’s Jon Heyman added some clarity on the matter last night, reporting that the Padres were preparing an offer to the judge that would have reached or exceeded $400 million over a 14-year period. However, Heyman further hears that Major League Baseball would have been prepared to veto such an arrangement had the parties agreed to it. Of course, it turned out to be a moot point once Judge decided he wanted to return to the only organization he’d ever known.
MLB vetoing a record deal would have been a fascinating story. The league’s justification for doing so would have been that the length of the contract was an artificial means for the team to avoid the competitive balance tax. A team’s luxury tax number is calculated by adding the average annual values of its commitments (plus player benefits and teams’ contributions to the pre-arbitration bonus fund). The luxury tax impact of any contract is distributed evenly throughout the deal, regardless of the actual payment of wages or bonuses.
If we assume the Padres’ prepared offer was for exactly $400 million over 14 years, the deal would have come with an AAV of around $28.57 million. That is true regardless of whether the money was evenly distributed, concentrated or not. A $400 million guarantee would have easily exceeded $365 million mookie bets received in his extension from the Dodgers and the $360MM in new money in the mike trout deal, establishing itself as the largest guarantee in MLB history. Spreading it out over a 14-year period, however, would put the average annual salary of $28.57MM out of the top 20 in history.
A lower-payroll team may prefer to stretch out a deal another season or two to lower its annual pay, but MLB’s concern is that the Padres’ offer would have been made specifically as a way to circumvent the luxury tax. The Padres have paid out CBT in each of the past two years, and will likely do so again in 2023. The Padres started the week with their 2023 CBT number hovering around the base threshold of $233MM. San Diego is liable for a 50% tax on its first $20 million over the threshold and 62% of its next $20 million in excess, with additional penalties thereafter.
Offering something like the $360 million, nine-year deal Judge agreed to with the Yankees would have come with a $40 million AAV that left the Friars with roughly $22.4 million in taxes. By contrast, a 14-year, $400 million offer would have come with an additional tax bill of around $15.3 million. The lower number in that contract would also have come into play if San Diego had made more roster additions, with the Friars starting with a lower CBT figure when calculating the tax hit associated with their later pickups.
MLB is understandably wary of a blatant solution to the luxury tax, which is designed to discourage spending among teams that already have large payrolls. However, it’s also somewhat curious to hear that they would have stepped in to veto such a proposal to Judge, considering that some large-market teams have already increasingly opted for a variation on this strategy: longer-term deals with comparatively higher annual salaries. low to reduce TB Obligations.
The Padres themselves moved into something very similar the day after Judge turned them down. Bogaerts’ $280MM contract has been extended for 11 years. The week before that, the Phillies (another team that paid CBT in 2022 and is likely to do so again next year) extended to 11 years to land Turner on a $300 million contract. A few years ago, Philadelphia turned 13 to sign a then-$330 million free agent contract for bryce harpers.
Those decade-plus commitments for superstars are the most obvious examples of extending contracts longer than most had anticipated, but it could be argued that it sometimes happens with the next level of player as well. brandon nimmo It was generally expected to get a five- or six-year warranty this offseason. The Mets went to eight years and $162 million, bringing the AAV down to just over $20 million but pushing the total guarantee beyond the anticipated range. Two offseasons ago, the Yankees extended a $90 million guarantee over six seasons (an annual salary of $15 million below general expectations) for DJ LeMahieu, who was entering his age-32 season at the time. MLB has approved or is expected to approve (Nimmo’s deal has technically not been announced yet) all of those contracts. The best remaining free agent starter, Carlos RodonHe is reportedly seeking a seven-plus-year deal this offseason. Large-market teams may see a longer term as more desirable if Rodon reduces his salary request per year for this reason.
Clubs have also incorporated solutions for luxury tax purposes into role player contracts through low cost player options. Player options are treated as guaranteed money for CBT purposes. Adding a player option to the end of a contract adds an additional year to the determination of its average annual value. Loading a contract early and then attaching a lower-salary player option to the end also serves as an effective fiscal endgame. The player receives most of the money from the deal during guaranteed seasons and usually anticipates declining the player’s option. Injuries or poor performance could change that calculation, but the understanding of everyone involved at the time of the deal is that one of the purposes of the option year is to reduce AAV. The Mets (taijuan walker), Stars (jake odorizzi) and Yankees (justin wilson) have delivered some variation of this contract in recent years. In each instance, MLB has agreed to that transaction.
Of course, the league is not in a position to preemptively create hard and fast rules to determine how much AAV tampering constitutes luxury tax tampering. MLB is left to evaluate things on a case-by-case basis. A 13-year deal for Harper that runs through his age-38 season was acceptable, as was an 11-year deal that runs through Turner’s age-40 season. A 14-year deal to see Judge through his age-44 season clearly wouldn’t have stood the test.
The judge’s situation at least raises the possibility of MLB intervening in future deals that it deems tax avoidance. That would have the potential to lead to a battle with the union. The 2017-21 collective bargaining agreement required all contracts to be submitted to the Commissioner’s Office for approval. If the league rejected an agreed settlement, the MLB Players Association would have the right to file a complaint challenging the ruling. The new CBA has yet to be published in its entirety, but there is no indication that the provision has been changed. It won’t end up mattering in this case with the AL MVP returning to the Bronx, but it makes for an interesting subplot to this winter’s best free agent negotiations.
