The Astros and the Luxury Tax

This week’s comments from Astros owner Jim Crane, wherein he expressed uncertainty about pursuing Gerrit Cole and stated a preference to remain south of the luxury tax, didn’t sit well with some of the team’s fans. Crane hardly issued a formal decree that Cole would sign elsewhere, but that’s long been the expectation based on Houston’s avoidance of doling out lengthy contracts to pitchers under the current regime. Rather, the Jeff Luhnow-led Astros have thrived at acquiring high-end pitching talent with multiple years of control while dodging the danger of six- and seven-year deals for pitchers.

Justin Verlander came to Houston with two years of club control remaining at a time when the Tigers desperately needed to shed money and replenish the farm. His subsequent extension the following year, while steep in annual value at $33MM, was only two years in length. Cole himself was acquired with two seasons of control remaining. This summer’s Zack Greinke trade was cut from the same cloth: pay up in young talent to add an elite arm without the inherent risk of committing six-plus years to said arm. Greinke is signed through 2021. In this regard (and many others), the Astros are the embodiment of the modern front office; pay a premium in annual value but eschew long-term commitments.

Recognizing that trend, the more interesting part of Crane’s comments was not that the Astros are unsure about pursuing a reunion with Cole but that the Astros prefer to remain under this year’s $208MM luxury barrier altogether. At first glance, that seems like an extraordinarily difficult task for the ’Stros to manage.

Based on the luxury tax calculations of our friend Jason Martinez at Roster Resource, Houston already has $165MM worth of salary counting against the luxury tax. Cot’s Contracts has them at $163MM. You might think that leaves about $43-45MM with which to work, but those estimates only include guaranteed contracts and estimated player benefits. They do not include the forthcoming raises for arbitration-eligible players, nor do they include the small but certainly not negligible chunk of money that’ll go to the pre-arbitration players on Houston’s 2020 roster.

The dilemma that’ll face the Astros this offseason becomes immediately apparent just by looking at their highest-profile arbitration case. George Springer earned $12MM in 2019 as part of a two-year, $24MM contract. That multi-year deal bought out Springer’s second and third arbitration seasons, but as a Super Two player, he’ll be eligible a fourth and final time this winter. I asked MLBTR contributor Matt Swartz for an early peek at Springer’s arbitration projection, and Matt kindly and quickly got back to me with a projection of a $6.9MM raise for Springer.

As Matt further pointed out, Springer’s reps could even try to argue that his “base” for that raise should be higher than $12MM. He’d have earned more than that in 2019 had he gone year-to-year rather than sign that two-year deal, as the Astros filed at $8.5MM in 2018 and Springer at $10.5MM. The two-year deal was a compromise, but his camp could push for the raise to be based off a salary more reflective of what he might’ve earned in a more traditional arbitration setting. For instance, while the two sides agreed that his Arb-2 and Arb-3 years were worth a total of $24MM, Springer’s side could say that his 2018 season was worth roughly $9.5MM (the midpoint between their filing numbers), meaning 2019 was worth more like $14.5MM. Building a raise off that number would obviously push his salary higher than simply giving him a raise off his 2019 rate of $12MM.

Digression aside: Springer could very well cost Houston in the neighborhood of $20MM next season. Meanwhile, Roberto Osuna will be in line for a raise on this year’s $6.5MM salary, as will Carlos Correa ($5MM), Brad Peacock ($3.11MM), Jake Marisnick ($2.19MM), Aledmys Diaz ($2MM) and Joe Biagini ($900K). Lance McCullers Jr. won’t earn a raise after missing 2019 due to Tommy John surgery, but players who miss an entire year due to injury typically repeat the prior salary they’d earned in arbitration. That’d be another $4.1MM for McCullers. Chris Devenski has a club option that’d add another $2.825MM to the ledger if exercised. We know Aaron Sanchez is trending toward a non-tender thanks to his ill-timed shoulder procedure, but that does little to assuage the Astros’ mounting tax bill.

The Astros, as currently constructed, look to be a surefire luxury tax payor. It’s not just that signing an elite free agent would put them narrowly over the top; rather, doing so would send the Astros crashing through that ceiling and likely catapult them into the second tier of penalization by placing them more than $20MM over the initial threshold. If the goal is to avoid the tax entirely, the focus should be more on the current roster rather than any potential free agents.

So, what can the Astros do if the really are aiming to avoid penalization? They’ll be tasked with moving some existing contracts and perhaps be pushed into some additional non-tenders (or trades of lower-end arbitration-eligible assets). Josh Reddick and his four-year, $52MM contract come with a $13MM luxury hit. The Astros have an MLB-ready heir in right field with Kyle Tucker emerging late in 2019, so moving Reddick makes sense. It’d be difficult, however, for the Astros to find a taker without offsetting some of that salary — either by including cash in the deal or taking another (smaller) contract back in return. That’s a start, but it’s not going to do the job on its own.

How about Yuli Gurriel? He’s signed only through the 2020 season, and his $47.5MM contract comes with a $9.5MM annual luxury hit. He’ll turn 36 next June as well, so while he had a terrific 2019 season, it’s worth wondering whether this could’ve been his peak year. There’s also Osuna, who is only controlled through 2021 and could see his arbitration salary spike north of $10MM next year. The Astros have already locked in Ryan Pressly’s salaries thanks to his spring extension, so they’ll have a late-game replacement should they shop Osuna.

Looking at the team’s list of arbitration-eligible players, it’s arguable that Houston doesn’t need to pay upwards of $4MM for a fourth outfielder such as Marisnick. Trading him would pare things back a bit further.

The problem for Houston is that even in an immensely hypothetical scenario where they make several of these moves, they’re still going to be hard-pressed to make their necessary additions while remaining under that luxury limit. For argument’s sake, let’s say the Astros non-tender Sanchez, manage to dump all of Reddick’s contract without taking any money back (unlikely) and then trade each of Osuna, Marisnick and Devenski.

Accomplish that set of hypothetical (and, again, unlikely) goals, and they could come in $10-15MM south of the tax line … before accounting for pre-arbitration players (i.e. league minimum, or close to it).

At that point, Houston’s rotation would consist of Verlander, Greinke, a returning McCullers and Jose Urquidy. They’d still need to add at least one starting pitcher. Behind the plate they’d be looking at Garrett Stubbs, who had a 79 wRC+ in Triple-A this season and will turn 27 next May. They’d still need to add a catcher. In the bullpen, perhaps they could piece things together with Pressly, Peacock, Biagini, Josh James, Bryan Abreu, Framber Valdez, Cionel Perez and other internal options, but it seems likely they’d want to add a reliever.

There are obviously ways to address those needs without spending heavily in free agency. Any of the speculative trade scenarios could net a reliever or a catcher. Houston could take a largely blocked prospect like Abraham Toro and trade him as part of a package to acquire some pitching help that, like Toro, has yet to reach arbitration. We know that Tucker and Forrest Whitley are effectively off limits in trade talks, but the Astros still possess other appealing minor leaguers, even if their farm system is nowhere near the powerhouse it once was (15th on Baseball America’s midseason rankings, outside the top 15 at MLB.com).

None of this is to say that the Astros can’t address their offseason needs and also check in below the $208MM luxury tax line. It’s possible, but it’ll take some creative maneuvering and perhaps require some moves that don’t go over well with fans. That’s the reality of fielding such a deep roster with high-end rotation talent (Verlander, Greinke) and paying to retain homegrown stars (Altuve, Alex Bregman) while others prosper in arbitration (Springer, Correa). On the plus side, that overwhelmingly talented core the Astros possess should make them division favorites again in 2020 regardless of what supplementary pieces are acquired this winter.

The question for the Astros, though, should be whether the necessary gymnastics to stay below the luxury line are worth it. Houston could cross the luxury barrier by less than $20MM in 2020 and pay a maximum of … $4MM in penalties. Even if they exceed the top tax line by $40MM, they’d see their penalties total about $10.4MM. Paying the luxury tax on a yearly basis comes with some consequences. Paying it once and dipping back under the threshold a year later (say, when Springer, Gurriel, Peacock and Michael Brantley are all off the books) shouldn’t amount to much more than a slap on the wrist.

One thing that’s constant throughout these scenarios: none of them involve Gerrit Cole. Unless the Astros make some shocking trades this winter or suddenly decide they’re comfortable living in the second or third luxury bracket for the next couple of seasons, his salary no longer fits into this complex puzzle.