MLB 2022 Luxury Tax Payrolls Exceed $5 Billion For First Time; Six Clubs Pay Penalties

Total compensation to players in Major League Baseball that involve salaries, benefits, medical costs, etc. for the purposes of the league’s luxury tax system exceeded $5 billion for the first time, a sign that the league has fully exited the pandemic.

According to The Associated Press, luxury tax payrolls for the league in 2022 were $5,164,589,774, a sizeable increase of $646,127,349 from 2021’s total of $4,518,462,425.

The luxury tax payrolls are a significant measure of player compensation as they include costs above just salaries and factor into possible penalties should clubs exceed certain thresholds. For calculation purposes, the payrolls are for 40-man rosters and include the average annual values of contracts and $16,016,707 per club for benefits and extended benefits, which include items such as health and pension benefits; club medical costs; insurance; workman’s compensation, payroll, unemployment, and Social Security taxes; spring training allowances; meal and tip money; All-Star game expenses; travel and moving expenses; postseason pay; and college scholarships. Also included is $1,666,667 per team for the pre-arbitration bonus pool, a system to reward players that perform at high levels before they enter salary arbitration.

For salaries, they can include earned incentive bonuses, non-cash compensation, buyouts of unexercised options, and cash transactions. In some cases, parts of salaries that are deferred are discounted to reflect present-day values.

Record-Tying Six Clubs Get Hit With Luxury Tax Penalties

Major League Baseball operates under a collectively bargained system in which clubs that exceed a payroll ceiling are taxed at varying rates. For 2022, it starts with clubs that exceed a luxury tax threshold of $230 million. A record-tying six clubs exceed the threshold for 2022 starting with the New York Mets who came precariously close to achieving MLB’s first-ever $300 million luxury tax payroll. Clocking in at $299,842,423 they come in $6 million over the second-highest Los Angeles Dodgers. They are followed by the New York Yankees, Philadelphia Phillies, Boston Red Sox, and San Diego Padres.

How much a club is taxed is based on not just exceeding the initial threshold, but how high over the initial threshold they go, and whether they have done so in consecutive years.

Penalties for exceeding the initial threshold in consecutive years remain the same as the prior labor agreement:

• 20% for the first time over
• 30% for the second consecutive year
• 50% for third or more consecutive years

On top of that, there is a tiered surcharge system:

• Exceeding first surcharge level ($20 million above the base tax threshold which is $230 million for 2022): 32% (1st), 42% (second consecutive year), 62% (third or more consecutive year)
• Exceeding second surcharge level ($40 million above the base tax threshold): 62.5% (1st), 75% (second consecutive year), 95% (third or more consecutive year)
• Exceeding new third surcharge level ($60 million above the base tax threshold): 80% (1st), 90% (second consecutive year), 105% (third or more consecutive year).

Based on the system, the Los Angeles Dodgers, not the New York Mets, were hit with the highest tax bill for 2022. At $32,397,344 it is just under what they paid for 2021. In just two years, the Dodgers have paid $65,047,309 or nearly the entire luxury tax payroll for the Oakland A’s in 2022.

Here’s the breakdown of how the penalties were accessed:

Dodgers pay

• 30% on the amount over $230 million but less than $250 million;
• 42% rate on the amount over $250 million but less than $270 million;
• 75% rate on the amount over $270 million but less than $290 million;
• 90% on the amount above $290 million.

Padres pay:

• 30% rate on the amount over $230 million.

Mets pay:

• 20% on the amount over $230 million but less than $250 million;
• 32% rate on the amount over $250 million but less than $270 million;
• 62.5% rate on the amount over $270 million but less than $290 million;
• 80% on the amount above $290 million.

Yankees pay:

• 20% on the amount over $230 million but less than $250 million;
• 32% rate on the amount over $250 million but less than $270 million

Phillies and Red Sox pay:

• 20% on the amount over $230 million.

Total luxury tax penalties:

• Dodgers: $32,397,344
• Mets: $30,773,938
• Yankees: $9,681,093
• Phillies: $2,882,657
• Padres: $1,524,638
• Red Sox: $1,229,936
• TOTAL: $78,489,606

Based on the latest labor agreement reached in 2022, the disbursement of the tax collected has changed. The first $3.5 million goes to player pensions for former players. The remainder sees half go to player benefits and half go to the commissioner’s fund which is designed to be distributed to payee teams that have grown local revenues and meeting the other criteria.

Nearly $700 Million In Luxury Tax Collected Since 2003

The current luxury tax system has been in place since 2003. With nearly $78.5 million collected for 2022, the total dating to 2003 stands at nearly $700 million ($693,182,973)

During the period the Yankees have paid the luxury tax in all years except for 2018 and 2021 (no clubs paid the tax in the 2020 60-game pandemic season). At $357,191,398 the Bronx Bombers account for over half the total collected.

But the Dodgers are quickly catching up and doing so in less time. They first broke the luxury tax threshold in 2013 and since then have only avoided going over in 2018. All told, they have amassed $228,051,815 in luxury tax penalties or 32.9% of the total.

What’s extraordinary is how the Red Sox have gone over the luxury tax thresholds but kept the amount and frequency somewhat manageable. They went over four consecutive years (2004-2007), but since then have only gone over two consecutive years a handful of times (2010-2011, 2015-2016, 2018-2019). All told, since 2003, the Red Sox have had a total of $45,882,352 in penalties, or 6.6% of the total. By comparison, in just one year, the New York Mets saw a $30,773,938 tax bill or 4.4% of the total.

Major League Baseball saw record revenues for 2022 at over $10.8 billion.

Below are the 2022 MLB luxury tax payrolls by way of The Associated Press: