Payroll is measured in AAV, not cash
The tax does not care what a player is paid this year. It cares about the average annual value of his contract: total guaranteed money divided by contract years. A backloaded nine-year deal counts the same in year one as it does in year nine.
That is why deferrals are so useful. Deferred money is discounted to present value before the AAV is computed, so pushing large sums into the future lowers a contract's tax hit without lowering the headline number the player gets to announce.
What else counts
A CBT payroll is not just the 26-man roster. It includes the AAV of every player on the 40-man roster with a guaranteed contract, money owed to released players, a share of player benefits (roughly $17 million per club), pre-arbitration bonus pool contributions, and salary retained in trades.
Players on the injured list still count. Minor league players on the 40-man count at a reduced rate. In-season additions count on a prorated basis, which is why deadline acquisitions of expensive players are cheaper against the tax than they look.
The thresholds
There are four tiers. The base threshold is the one everyone talks about; above it sit three surcharge tiers, each roughly $20 million apart. Crossing a higher tier does not retroactively re-tax the money below it — each dollar is taxed at the rate of the tier it lands in.
First-time payers face a modest rate on the base tier. A second consecutive year over raises it. A third or subsequent consecutive year raises it again, and the top surcharge tier pushes the effective marginal rate on those dollars far above 100% once you include the draft penalty.
The draft and international penalties
Money is the visible penalty; the draft pick is the one front offices actually fear. A club that finishes above the highest surcharge tier has its top pick in the following draft moved back ten places, and clubs over the tax face reduced compensation when a qualifying-offer free agent departs, plus a steeper cost to sign qualified free agents.
This is the mechanism behind the annual ritual of contenders squeezing under the line by late July: resetting the repeat-offender clock is worth tens of millions over the following two seasons.
How this shapes deadline behavior
A team near the line has three levers: acquire cheap players, ask the trading partner to retain salary, or send salary out in the same deal. Retained salary counts against the retaining team at the retained AAV, and a club may retain money in a maximum of three deals per year involving the same player and cannot retain more than half.
This is also why a third team so often appears in modern blockbusters. The middle club absorbs salary or launders a bad contract in exchange for a prospect, letting the contender stay under a tier it cares about.
Using the tax in Armchair GM
In Diamond GM's Armchair GM mode the frozen panel at the top of the screen tracks your CBT payroll live as you sign, trade, option and release players. If a signing pushes you into a new tier, you will see it immediately rather than discovering it after you have built a roster you cannot afford.
The practical habit to build: before you make an offer, know which tier you are in, how far the next line is, and whether the win you are buying is worth the marginal tax on top of the salary.