December 12, 2012

Bizball

Yankees' Focus on $189 Million Not Just About the Luxury Tax

by Maury Brown

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Taking stock of the Yankees this offseason is a little like watching The Walking Dead. With the injuries to Alex Rodriguez and Derek Jeter, the left-side of the infield has decimated, and who knows how their future Hall of Fame closer, Mariano Rivera, will rebound from his injury last year? At a time when getting aggressive in free agency would be part and parcel for the Yankees, they are, instead, paring back. As strange as it sounds, “fiscal restraint”—whatever that is for the Yankees—has become a hot topic. In interview after interview, be it Hal Steinbrenner or Brian Cashman, talk of getting below “189” seems to find its way into the conversation.

For the uninitiated, “189” is a reference to MLB’s luxury tax ceiling of $189 million in player payroll that is set to hit in 2014. The Yankees have said that they are serious about getting under the figure by then, when the tax rate for the club would hit a whopping 50 percent for every dollar over that $189 million threshold. Last year, the Yankees had a luxury tax bill of $13,896,069, and they’ll certainly be paying again this year when the end-of-year payroll figures are released just before the holiday. As of 2011, the Bronx Bombers have paid $206,109,142 in luxury tax penalties, or 91 percent of the $227,119,157 total collected since 2003. It’s been painful to the Yankees’ wallet, so getting under that $189 million threshold is all about avoiding the luxury tax, right? In part, but there is something else to consider.

The current CBA features an additional mechanism to thwart lavish player payroll spending via penalties through the revenue-sharing system. In the new labor deal, the top 15 clubs by market size now have some of the revenue-sharing money that they pay into set aside and transferred to the likes of the Pirates and Royals. Depending on whether they break the luxury tax threshold (as well as how many consecutive times they break it), they’ll now get hit with an additional tax beginning in 2013

It works like this: for each year of the labor agreement, the top 15 clubs by market size are disqualified from receiving  a growing percentage of net revenue-sharing proceeds they otherwise would have been entitled to.  However (and here’s where the Yankees fit in), the CBA provides a clause by which these revenue-sharing funds are rebated for clubs that don’t break the luxury tax ceiling. The percentage of the revenue-sharing rebate that gets penalized if a team breaks the luxury tax ceiling escalates for each consecutive year: 25 percent for the first offense, then 50 percent, 75 percent, and eventually none of it comes back depending on how many years in a row the team blows through the luxury tax ceiling. It’s this escalating tax rate in two locations (the tax you get hit with for going over the luxury tax ceiling on top of the percentage of revenue-sharing held for being a top 15 market club) that can add extra pain to the Yankees’ wallet.

So when you think about it, the Yankees really have four reasons to get under the luxury tax threshold. For one, they will be lowering the actual payroll to $189 million, which is a savings by itself. In doing so, they avoid paying the luxury tax penalty, and they don’t lose revenue-sharing money through the new “Market Disqualification Refund.” It’s the fourth reason that could be of particular interest, though; if or when the Yankees finally break the consecutive year cycle of being over the luxury tax threshold, those steep tax rates reset. Thus, in the eyes of the CBA, it’s as if the Yankees have never been a luxury tax offender before. That could be an enticing position for the Yankees to be in. With the four aspects in combination, isn’t there the capacity to then step back on the pedal and fire up the spending machine in, say, 2015? The timing would certainly be interesting; the current contracts of Mark Teixeira and CC Sabathia are set to expire in 2016, and Alex Rodriguez’s expires the year after.

In the end, it’s the Yankees. There’s nothing to say that, at any point, they won’t drop the hammer as they’ve done so many times in the past. In looking at the larger picture, while the luxury tax and this new wrinkle with revenue-sharing seems squarely targeted at the Yankees, the league may be setting its sights a coast away on the Dodgers, who will almost certainly break the luxury tax threshold next season and likely a few more to come.

Maury Brown is an author of Baseball Prospectus. 
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