How the new luxury tax affects the Yankees

There is plenty to digest in the new collective bargaining agreement. MLB and the MLBPA made sweeping changes in a number of areas, though the greatest ones cover amateur players. Yet there is one change that could affect teams at the Major League level — or, at least, it will affect the Yankees. As Mike noted on Monday, the luxury tax threshold and tax rate will increase in 2014. That gives the Yankees two more years at the current level, but it could become costlier for them to spend in two years. That could affect how they approach this off-season.

As the Yankees search for another pitcher this off-season, they’ll look at a number of pitchers who will be with the team through 2014. That might be a straight free-agency contract, as in the case of Edwin Jackson or C.J. Wilson. It could also come in the form of an extension following a trade. Whatever the case, the Yankees could in many ways add to the 2014 payroll this off-season. As is typically case for future Yankee payrolls, they already have quite a few commitments on the books.

Before signing any further contracts, the Yankees have $75 million tied up for 2014. Chances are that will be at least $80 million, since only the $3 million buyout in Derek Jeter’s player option currently counts. While $75 to $80 million might seem like a decent starting point, it covers only three to four players: Alex Rodriguez, CC Sabathia, Mark Teixeira, and perhaps Jeter. With multiple starting positions and rotation spots left to fill, the Yankees could find themselves increasing payroll even further. That’s going to cost them plenty under the new CBA.

While the luxury tax threshold will increase to $189 million, the tax rate will jump 10 points, to 50 percent of all payroll above that $189 million level. This actually helps the Yankees at their current levels. Last year’s $207 million Opening Day payroll would have been taxed at 40 percent above $178 million, or $11.9 million. At a 50 percent rate above $189 million the tax bill would have been just $9 million. The tax rates even out at a $233 million payroll, meaning the new luxury tax, compared to the old one, benefits the Yanks at all payroll levels up to $233 million. That is, their overall payroll, including tax, would have been higher under the old system.

(And I realize that Opening Day and luxury tax payroll figures aren’t the same; this is just a for-instance.)

This helps the Yankees in many ways, especially since it begins in 2014. Again, the Yankees are down to three or four players, and have a good chunk of payroll already committed. If Robinson Cano commands, say, $22 million per season, that’s $102 million for five players. The payroll might even climb dramatically from there. They have one outfielder and one relief pitcher under team control, and both — Brett Gardner and David Robertson — will be entering their third years of arbitration. That leaves two outfield spots, catcher, three rotation spots (assuming Ivan Nova keeps it up), and nearly an entire bullpen. Even if Gardner and Robertson combine to earn $10 million those are a lot of spots to fill for under $100 million. This new luxury tax threshold, then, will certainly benefit the Yankees when they need it most.

For an example of how it can help, let’s look to the Yankees’ all-time high payroll, $213 million in 2010. That year they actually paid $227 million that year, with the 40 percent tax above $178 million. Let’s say that their absolute maximum, in any year, is $230 million. That’s the number which Brian Cashman can exceed in no scenario. With the new 50 percent tax on payroll over $189 million, the Yankees could support a $216 million payroll and still pay the same $230. It might seem like a small amount, but that $3 million might cover, say, Ivan Nova’s arbitration case. That gives the Yankees a bit more flexibility than in the past.

The change might seem small, but it does benefit larger market teams. They can either stay at the same payroll levels as in the past and save money, or they can extend payroll a bit further and still pay less than they would have under the old tax rate. Of course, it also allows other teams to move towards $189 million, rather than $178 million, tax free. But the Yankees are likely more concerned about their own books than those of their opponents.