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The Giants and the luxury tax, explained

The Giants have three or four holes they need to address before the season, and they’re determined to avoid the luxury tax. Can that work?

Cincinnati Reds v San Francisco Giants Photo by Thearon W. Henderson/Getty Images

The Giants traded Matt Moore to save $9 million and get them closer to their dream of reloading the roster and staying under the luxury tax line at the same time.

The Giants signed a backup catcher for $2.5 million, getting them no closer to improving the 2017 roster, but pushing them that much closer to the luxury tax line.

Should Giants fans be worried? Excited? What’s a luxury tax, anyway? How much do they have to spend? How much does it take to get good players?

I have answers! Some of them. I’ll leave it up to you as to if you should be worried or excited, but we can at least discuss some of the basics.

What is the luxury tax?

The competitive balance tax, known colloquially as the “luxury tax”, is a penalty that MLB has instituted in an effort to suppress salaries. It’s become a de facto salary cap, and it helps rich owners keep more of their profits. Here, if you’ll look at this pamphlet, comrade, you’ll see that ...

Oh, you wanted the non-judgmental definition. Here’s one from Pravda. Basically, if the Giants exceed $197 million in payroll, they’ll have to pay a 50-percent penalty on every dollar spent over $197 million. So if the Giants are at that figure and sign Dram Stallone for one year and $10 million, they’ll pay $15 million for his services — $10 million to the player, and $5 million into a shadow fund that the league uses to prop up sympathetic dictatorships around the world. Probably. Actually, I have no idea what they do with the money, but the point is that the teams don’t keep it.

But if a team dips under the tax for a year, the penalties reset, and the next time they go over, they’ll have to pay a 20-percent penalty. This saves the team millions.

How close are the Giants to going over the payroll limit?

This is a tricky thing to answer because there have been times where the teams have been surprised by MLB’s calculations. The figures used include player benefits and per diems and all sorts of things that don’t show up in raw salary.

The best we can do is guess, and Alex Pavlovic’s estimate of $15 million to $17 million after re-signing Hundley sounds about right.

What can the Giants do with their $15 million to $17 million?

They can address one of their big needs (third base, center field, and a corner outfield spot) through free agency. For example, the Giants could sign Jay Bruce, then give the third base and center field jobs to Christian Arroyo and Steven Duggar, respectively. There, the lineup is fixed.

[looks around, nervously]

Okay, maybe it’s not exactly fixed, but it’s definitely under the luxury tax.

Or the Giants could sign Todd Frazier, then have juuuuust enough money left over for Jarrod Dyson. They would have to use Denard Span in left, and Hunter Pence would be back in right field, but at least they would have a pair of over-30 players with a chance at a .320 OBP.

[sighs so loud the cat wakes up]

I promise you that even though the Moore contract cleared salary, this is still going to get absurdly tricky. The Giants will need to trade for young players who don’t make a lot, or they’ll have to trust their own young players who don’t make a lot. There’s no way around that. They’re not so far under the tax that they’ll be able to fill third base, center field, and a corner outfield spot through free agency.

Oh, and they want a left-handed reliever. So.

What’s all this chatter about the Giants looking to trade Denard Span in a deal that helps them get under the tax?

The tax is based on the average annual value of a contract. If a player earns $1 million one year and $3 million the next, his contract counts as $2 million against the tax every year, even in the years were the salary is lower. This affected the Giants negatively when they would backload some of their contracts, like with Jake Peavy and Sergio Romo.

But if the Giants can convince a team to take Span’s salary — either in a deal to acquire an expensive player, or with another team essentially buying a prospect from them — they’ll have that much more to spend this year. Consider the case of Evan Longoria, who would count as a $17 million hit against the luxury tax. The Rays are worried more about the $83 million he’s owed over the next five years than the money he’ll make next year. The Giants would be more worried about the $17 million hit this year.

If the Giants include Span in that deal, though, they could add Longoria and just $2 million to their 2018 luxury tax figure. Considering that the Rays would likely have to add cash to a Longoria deal to get good prospects, it’s possible that they would consider this kind of move. This is why the Giants’ reported offer for Giancarlo Stanton had Span in it.

It’s still unlikely that Span will be traded, but this is why you hear his name. It would be easier for the Giants to trade him for a player who makes $100 million than it would be for them simply to sign a player who makes $10 million. Strange, but true!

Trading for a young position player or trading Span in a complicated deal are their only options, then?

Pretty much. If the Giants trade Denard Span and Christian Arroyo for Evan Longoria, and then they trade Hunter Pence (with his permission) and Hunter Strickland to the Astros, they would have enough to sign J.D. Martinez. Easy peasy!

Except that’s not going to happen, so the Giants will need to look at super cheap players. Billy Hamilton doesn’t really apply, either. We’re talking Maikel Franco or Domingo Santana — the players making pre-arbitration money. Those players will take prospects. This is the worst part about the Giants having exactly one super-high-upside prospect; that’s the guy everyone will ask for. If the Giants don’t want to part with Heliot Ramos, they’re going to have problems getting a desirable young hitter.

They can sign one expensive free agent, in other words. That would be Jay Bruce or Todd Frazier, neither of whom I’m especially geeked about. They might be able to sign two lesser contracts, like Jon Jay and Eduardo Nuñez, but I’m not so sure if that’s enough to win the NL West, friends.

The likelier plan involves either trading for pre-arbitration (or cheap) players, or dealing Span/Pence to get more flexibility. There isn’t a way to fill three holes acceptably in this market with just $15 million.

They’ll need to get creative or trust their own players over the howls of fans who were half-expecting Giancarlo Stanton and/or Shohei Ohtani.

There is still a chance that this team somehow comes away with a productive lineup. I’m still stupid enough to believe that. They have Buster Posey, Joe Panik, Brandon Crawford, and Brandon Belt, all of whom have been above-average players for a majority of their careers, and if they get a left fielder, center fielder, and third baseman to join them, I can be bullish on the lineup’s potential. Just try and stop me.

The only problem is that finding a left fielder, center fielder and third baseman, while staying under the fake salary cap, will be extraordinarily tricky. The Giants want to reset the luxury tax, and I don’t blame them.

This is the difficulty that the Giants face. It’s a juggling act, and there are chainsaws involved, and the Giants don’t really juggle, but they saw a YouTube video on it, so they’re pretty confident. But hopefully you have a tiny understanding of what the luxury tax is and why they’re trying to get under it.

It’s going to be hard, though. It’s going to be hard, and it’s going to cost prospects that one of the worst farm systems in baseball can’t really afford to lose. Them’s the breaks. But it’s probably what they’ll have to do to stay under the luxury tax.