Nov
23

How the new luxury tax affects the Yankees

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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.

Categories : Front Office
  • Yazman

    What about the provisions regarding minor league and international signings? They looked pretty negative from a NYY viewpoint.

  • MattG

    I have to disagree. This hurts the Yankees because:

    1. the threshold does not change for two years
    2. the tax rate is increasing

    The threshold should increase every year, due to inflation. I’m not an economist, but the fact that it will increase 6% two years from now doesn’t even seem to reflect the rate of inflation.

    • Plank

      Agreed. Even if this helps them in 2012, the whole soft cap is designed to stop the Yankees from spending and indirectly stop other teams from spending through decreased competition for FAs.

      This makes the soft cap even firmer with no (or slightly higher cap) and stiffer penalties for exceeding it.

      • Plank

        that should be:

        with no change (or small increase)

    • Gonzo

      6% for two years isn’t that far off for US inflation, especially if we hit another rough patch in the economy. For baseball, it is low, but for the rest of us it’s not that far off. It’s possible that it can be right on target.

      It’s high if you use SS as a template. They are getting a COLA increase of 3.6% in 2012. The first increase since 2009.

      • MattG

        Well, but wait–when did the threshold increase last? It will be at $178 for at least three years. The next two, and this past season. So that’s 6% over at least three years.

        Also, not everything has an equal rate of inflation. I believe I read somewhere that salaries have actually decreased in the last ten years, but gasoline (for example) has increased nearly 300%.

        • Hardy

          Tax thresholds were

          2003: 117
          2004: 120.5
          2005: 128
          2006: 136.5
          2007: 148
          2008: 155
          2009: 162
          2010: 170
          2011: 178

        • Gonzo

          The luxury tax rate threshold has increased every year since 2003 including this past year.

          There is no question there are different rates of inflation. The rate used for SS is the CPI-W. It’s for a basket of goods. Although SS does a “nice” job of excluding high inflationary items. Using a basket of items evens out things so to speak.

          If you use just aggregate US inflation, it’s still not far off. For example, 2009 gave us an insanely low inflation rate. It was negative most of the year.

          • MattG

            OK, then, I would suggest ‘fair’ would be a 3% increase this year, and a 3% increase the next year, and no bump in the tax rate. If true, this does not help the Yankees, and the 10% bump in the tax rate and freeze on the threshold will certainly hurt them.

            • Gonzo

              Yeah, one thing wasn’t crystal clear, if this was a 10% rate increase for all types offenders or just a implementation of a 50% across the board for all offenders.

              If it’s a 50% across the board for all offenders, it would probably hurt teams more that are right on the cusp of going over that have never been offenders.

              Sounds like it’s an implementation of a across the board 50% tax regardless of it’s your first offense. At least that’s what it looks like, but I wouldn’t bet money on it.

              • Plank

                It’s 50% for a 4th straight year offense. The first year is in the teens I believe. Second year is in the 20s and third year is 40%.

                Those numbers aren’t exact obviously but the idea is correct.

                • Gonzo

                  The old CBA:
                  1st offense 22.5%
                  2nd offense 30%
                  After 2nd offense 40%

                  What I want to know is it now:
                  All offenses 50%?
                  or
                  1st offense 32.5%
                  2nd offense 40%
                  After 2nd offense 50%?
                  or
                  1st offense 22.5%
                  2nd offense 30%
                  After 2nd offense 50%?

                  • Plank

                    The first year and second years get lower. The third year stays the same and 4 or more years increases to 50%.

                    • Gonzo

                      Oh, this is more palatable from a players prospective then.

                  • Plank

                    V.. COMPETITIVE BALANCE TAX
                    a. The threshold level of $178 million in 2011 will remain unchanged in 2012 and 2013. The
                    threshold will increase to $189 million for 2014, 2015, and 2016.
                    b. The tax rate will decrease to 17.5% for Clubs that exceed the threshold for the first time, and
                    the rate will increase to 50% for Clubs that exceed the threshold for the fourth time or more.
                    Rates will remain the same for Clubs that exceed the threshold for the second time (30%) and
                    third time (40%). The CBT rates in 2012 will be subject to a transition rule.
                    c. The Competitive Balance Tax structure under the 2006 Basic Agreement will be modified so that
                    a team that moves below the threshold will be treated as going over for the first time when it
                    next exceeds the threshold.

                    • Gonzo

                      Wow, so if Cash can get under the CBT threshold, they would be treated as virgins when the go over it again?

                      This is almost like the Yankee clause because they are the one team that would probably never get under the CBT threshold.

                    • Hardy

                      So from 2006 to 2011 the tax threshold went up 30% and now from 2011 to 2016 the tax threshold will go up 6%.

                      That CBA is a true disaster for the Yankees.

                    • Plank

                      Hardy:

                      Yeah, the Yankees are getting shafted. Joe is a smart guy, but I don’t know what he’s on about.

                      From an on the field competitive aspect:

                      This benefits every team BUT the Yankees. The Red Sox and Phillies are the real beneficiaries of this new deal. If they go over one or two years, it’s a lower percentage tax and it lets them pull closer to the Yankees in payroll without paying the same tax rate.

                      From a Steinbrenners as owners who care about profit perspective:

                      This is the a great deal since there are huge disincentives to give the money to players and instead to keep it themselves. They can’t spend it on major league payroll since they will be heavily taxes, they can’t spend it on the draft, since they will be heavily taxed and penalized, they can’t spend in on IFAs since they will be heavily taxed and penalized.

                    • Hardy

                      All that and from now on the second best record in the AL might result in a do-or-die game to reach the playoffs.

          • Plank

            I feel like it would make more sense to tie it to league revenue.

            • Gonzo

              Good point. There still might be some connection depending how they figure it out increases in the future. Here are revenue increase %’s for the past 3 seasons not including 2011:

              2008 6.6%
              2009 1.5%
              2010 6.1%

              Someone posted that 2011 revenue growth was fairly flat, but I can’t find it. If you calculate for ownership’s cut, it actually could have been tied to revenue. I don’t know if anyone involved with the CBA would divulge that information.

  • Hardy

    You seem to describe an inflation-free world. But it is likely that MLB salaries will go up over time.

    There is no increase in the tax threshold for two years and then comes an increase of about 6%. In real terms the tax threshold will only go up if salary inflation per year is less than 2%.*

    Additionally the tax rate will go up. I just can’t see how this is in any way a good deal for the only team in tax territory.

    * Between 2003 and 2011 the average growth of the tax threshold was 6% per year.

  • Jose M. Vazquez..

    What the Yankees need to do is keep improving the farm system so that they don’t have to pay the high prices for free agents. Although with this new system it appears as though it will become more difficult to replenish the farm with new product. I don’t know that they do but I would be bothered to know that some of the luxury tax money is going to say Seattle or Toronto whose owners have more money than the Steinbrenners, they just don’t want to spend toput a good product on the field and that is why the fans stay away from the ballpark. If you build it they will come to quote from Field of Dreams.

    • Plank

      Luxury tax money doesn’t go to other teams. It never has.

      • Hardy

        That is technically correct. However, much of the money is spend on things that would arguably otherwise be paid by all owners.
        Therefore it is reasonable to say that the luxury tax payments by the Yankees help the bottom line of other teams.

      • Jose M. Vazquez..

        I ask you then why did the union complain a few years ago that the Marlins were pocketing the tax money and not spending it on players. Am I correct or was the complaint for another reason?

        • Plank

          That’s revenue sharing. That’s a different check the Yankees cut.

          • Jose M. Vazquez..

            My mistake. Thanks a lot for illuminating me. Still if theis money went to the afore mentioned teams it would bother me aplenty.

      • RetroRob

        Luxury tax doesn’t *directly* go to other teams, yet if the Yankees were to fall below the threshold, then the other teams would have make up for that loss.

        • Bryan

          Two cents on this column about how CBA hurts smaller teams.

          IFA will sign with the team that gives him the best chance to reach the majors, the fastest. It’s not as cut and dry as which team has the brand power like the Yankees. Take Michael Ynoa and Felix Hernandez as recent examples, they spurned the Yankees for smaller market teams they knew they could have a shot at early promotions. The Yankees are notoriously slow in promoting prospects.

          The IFA cap and draft signing pool systems are designed to deflate amateur bonuses. The new draft is designed to be progressive, leading to a stronger competitive balance. Keep in mind how the NFL’s CBA is becoming similarly restrictive for amateur talent. Two-way players won’t spurn baseball if they know they’ve got a better shot at it than football or basketball. The NBA’s previous CBA was especially restrictive – only 30 first rounders get guaranteed contracts, and while their salaries are comparatively more than MLB bonuses, it’s awfully more competitive and riskier trying to get into the NBA’s first round where amateurs are only eligible once, with a larger player pool to choose from (Europe, Americas, Asia) than the MLB’s first round where amateurs can be eligible up to four times with a smaller player pool (USA,Puerto Rico and maybe Canada).