Toronto Blue Jays: Will Ownership Spend Past the Luxury Tax?
By Charles Kime
Now that the Blue Jays season is over, one of the key offseason questions will be whether ownership is willing to spend past the MLB luxury tax threshold, and what that would might look like. Given the team that swept the Blue Jays in the Wild Card series, the Seattle Mariners, were just swept themselves out of the ALDS by the Houston Astros, there is clearly a large performance gap between the 2022 Blue Jays and a team built for a deep postseason run and World Series success. Will an increased payroll be one of the ways that management can address that gap?
After ending the regular season with a $204 million competitive balance tax (CBT) payroll according to Spotrac, the Blue Jays are projected to see that luxury tax payroll rise to $210 million in 2023 just through arbitration raises for their 13 arbitration eligible players. That doesn’t include re-signing any of their free agents Ross Stripling, David Phelps or Jackie Bradley Jr., nor does it include any long term contract extensions to buy out the arbitration years of their young homegrown stars like Vladimir Guerrero Jr., Bo Bichette or ace Alek Manoah.
It also doesn’t include any new free agent signings to add high leverage “swing-and-miss” arms to the bullpen – a clear need identified by GM Ross Atkins in his season ending press availability; or potentially two starting pitchers to replace the injured Hyun Jin Ryu, Stripling should he sign elsewhere, or the ineffective Yusei Kikuchi and Mitch White at the back end of the starting rotation. Given the lack of MLB ready pitching depth in the poorly ranked Blue Jays farm system, pitching depth is a key need to improve this club and increase the chances of playoff success.
In other words, to improve the odds of winning the World Series in this current window of contention there are a lot of financial needs to fill in terms of MLB pitching depth, a left-handed power bat to balance out the hitting lineup, and to lock-up the young core beyond their arbitration years. As Atkins noted on contract extensions in his year end press conference, “There will be urgency there, but there has [always] been urgency there. So that dialogue will continue. Some of the groundwork is laid, and that increases the likelihood [of a deal] in our view.”
Will Blue Jays Owner Rogers Communications Spend Past the Luxury Tax in 2023?
According to MLB Blue Jays beat writer Julia Kreuz, “the front office anticipates still having the resources to be active, despite an increasingly larger payroll.” She quoted GM Ross Atkins saying,
"We’ve had nothing but support and a lot of flexibility from day one. We’ve always had a strategy with the resources that we requested and have always been granted them. … The first step will be working through where the opportunities are and exactly what we feel the needs will be."
As per Spotrac, seven MLB teams are projected to have exceeded the $230 million CBT (“luxury tax”) threshold in 2022, led by the NY Mets at over $313 million. But the Jays’ AL peers including New York, Boston, Chicago, Los Angeles and Houston all spent more than the Jays on payroll in 2022.
Here is the MLB explanation of the competitive balance tax (CBT). As per MLB:
"Those who carry payrolls above that threshold are taxed on each dollar above the threshold, with the tax rate increasing based on the number of consecutive years a club has exceeded the threshold. A team’s Competitive Balance Tax figure is determined using the average annual value of each player’s contract on the 40-man roster, plus any additional player benefits. Every team’s final CBT figure is calculated at the end of each season."
That luxury tax limit will rise from $230 million in 2022 to $233 million in 2023, and each year thereafter up to $244 million in 2026, the final year of the current collective bargaining agreement (CBA) between MLB owners and the MLB Players Association. Above that, teams are taxed at 20% on all overages in their first year exceeding the threshold, 30% the second year, and 50% the third year and each year thereafter. For clubs exceeding the threshold by $20 million or more, there is also a surcharge that can rise to 60% above $60 million or more. The threshold is reset if the club dips below that for one season.
Will Toronto join the ranks of the teams exceeding the limit in 2023?
That will depend on whether team owner Rogers Communications is willing to trigger the luxury tax – and for how long. The $20 million AAV contract for starter Hyun Jin Ryu will fall off after the 2023 season, and other pending free agents after next season include Matt Chapman, Teoscar Hernandez, Whit Merrifield, Raimel Tapia, Anthony Bass, Yimi Garcia, Adam Cimber and potentially also Lourdes Gurriel Jr. This means the Blue Jays have only $99 million in committed luxury tax payroll before any arbitration awards in 2024.
But that still leaves a potential hurdle to clear for 2023. Assuming ownership and the front office are committed to building a team built for playoff success next season – which means 2~3 “swing-and-miss” relievers, potentially two new starters, and more power bats from the left-side of the plate – it’s a reasonable assumption to expect they’ll spend through the $233 million luxury tax threshold in 2023. As noted above, the 2023 CBT payroll is already $148 million, plus the 13 arb eligible players who are projected to make $62 million next year, so that’s $210 million already, without Stripling or Phelps, and without any new additions.
Regarding Ross Stripling, this year’s qualifying offer (QO) – the average of the top 125 salaries in MLB – looks like it will be set at $19.65 million, a record amount and up from $18.4 million last year. Will the Blue Jays make a QO to Strip? Or will they try to negotiate a multi-year deal? Regardless, he’s due for a big pay increase above the $3.79 million he made in 2022.
So with the Blue Jays luxury tax payroll already projected to be around $210 million with the 13 arbitration players included, plus those clearly identified needs to make the team more competitive in 2023, a reasonable fan would assume that ownership will be willing to exceed the $233 million threshold given the team is clearly in the “win now” part of their competitive window. Why would they ‘nickel and dime’ things when they are already so close to spending above the luxury tax threshold?
Rogers Makes Billions
Of course, Rogers is a “for profit” publicly listed corporation with shareholders, stakeholders and 23,000 employees. While stakeholder capitalism in Canada is slightly different than shareholder capitalism in the United States, they still seek to maximize profits. Their media segment, which includes sports media and entertainment like the Blue Jays and Sportsnet, as well as Rogers Centre, and a 37.5% ownership interest in Maple Leaf Sports & Entertainment (MLSE), which owns the Maple Leafs, Raptors, Toronto FC, Argonauts, and the Toronto Marlies, had $2.0 billion in revenues in 2021.
In the three months from April through June 2022, that media segment saw revenues grow 21% year over year, primarily due to higher Toronto Blue Jays revenue as a result of the return of home games to the Rogers Centre at the beginning of the season, and higher advertising revenue on Sportsnet. That compares to an only 6% increase in media segment operating expenses between April and June on higher Toronto Blue Jays expenses, including player payroll, and game day costs due to the return to the Rogers Centre; in other words, their marginal profits on the Blue Jays and Sportsnet grew year over year because revenue growth was much higher than operating cost growth (translation: they made lots of money!).
For their fiscal year ending December 2022, Rogers’ management is guiding for total service revenue growth of 6% to 8% above 2021, with adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) growth of 8% to 10%, all while spending $2.8 to $3.0 billion on capital expenditures, and generating $1.9 to $2.1 billion in free cash flow (FCF), which is a measure of how much cash they’ll generate after paying all of their operating expenses and making investments in their business via capital expenditures. In fact, management has paid $1.0 billion or more in annual dividends to their shareholders every year since 2017.
The point being that adding another $40-50 million to the 2023 Blue Jays CBT payroll, which would take them to the $240-250 million range from the $204 million figure in 2022, would not present any serious financial burden on ownership. And to the extent that a more competitive team might increase attendance at Rogers Centre, as well as merchandise sales, and even playoff revenues in 2023, it will be up to team President Mark Shapiro and GM Ross Atkins to convince Rogers management that now is not the time to skimp; rather it’s time to go “all in”.
Remember also that Rogers has built a huge equity stake in the Toronto Blue Jays after buying them for US$112 million in 2000. According to the Forbes Magazine, the club is now worth US$1.78 billion, the 14th most valuable franchise in MLB. Sportsnet has a monopoly on Blue Jays media rights with only one MLB team in Canada, and with the GTA as the 4th largest media market in MLB, that’s a lucrative deal. The three larger markets in New York, Chicago and Los Angeles all support two MLB franchises; Rogers has the Canadian market of 38 million people all to itself.
Do They Have a Choice?
According to Cot’s Baseball Contracts, the Blue Jays opening day 26-man player payroll (not 40-man CBT payroll) has never exceeded the $171 million it stood at at the start of the 2022 season since Rogers Communications bought the team in 2000. All things equal, that number will be higher again in 2023 after arbitration awards, exercising the $3 million club option on reliever Anthony Bass, and additional new player signings. It’s also reasonable to assume that Mark Shapiro and Ross Atkins will be trying to sign some of the young stars to long term contract extensions this offseason.
It’s fair to assume that the Blue Jays will have their highest ever payroll in 2023 and that the CBT payroll will exceed the CBT threshold of $233 million. There’s no reason for Rogers to skimp on payroll given the clear needs to push the Blue Jays over the hump for deep postseason success in 2023.
Whether that includes a $19.65 million QO for Ross Stripling, new free agent signings in the deep end of the “swing-and-miss” reliever pool with closers like Edwin Diaz, Kelley Jansen and Taylor Rogers all pending free agents, a left-handed hitting free agent OF like Kevin Kiermaier, Andrew Benintendi, Brandon Nimmo, or the switch-hitting Jurickson Profar, who could push George Springer to RF and free up Teoscar Hernandez for a trade for more MLB pitching depth, and big contract extensions to buy out the arbitration years of the young stars remains to be seen.
But spend, they will. They don’t really have a choice. Not spending more would send the wrong message to the players, their agents, and the fan base hungry for more and left wanting after the abrupt and shocking playoff exit this year.