The luxury tax non-issue

If you haven’t listened to last night’s podcast yet, you should totally do that. In the meantime, I’d like to pull out a point that was made by Rob Abruzzese of Bronx Baseball Daily about the luxury tax that I think deserves a special level of recognition. In case you haven’t heard, the Yankees were just hit with an $18.9 million luxury tax bill this season, with a taxable payroll of $222.5 million. That means that the combined expenditure was a pretty daunting $241.4 million. So considering that, it’s no surprise that the Yankees want to avoid paying a punitive 50% luxury tax rate, right? Well there’s just one problem with that: the Yankees tax bill would actually be lower under the system they’re so desperately trying to avoid.

How is that possible? It’s simple: While the rate the Yankees will be taxed at will go up, the luxury tax threshold is also increasing from the $178 million mark it currently sits at. Since the luxury tax is applied marginally (which means that it only applies to spending above the threshold, not the entire payroll), that higher tax rate will be applied to a smaller amount of spending. Assuming the same $222.5 million taxable payroll, the new tax structure would have left the Yankees with a bill of $16.75 million, or $2.15 million less than what they paid under the current, lower, rate. That’s still a lot of money in the grand scheme of things, but it’s a number they’ve proved to be willing to spend in the past, and it also assumes no gradual reductions in payroll at all.

Of course, that $2.15 million savings is also a much smaller number than the $40-50 million they could stand to make through a combination of payroll cutting, tax savings, and revenue sharing rebates, so it’s still easy to see why ownership is hell bent on cutting spending. But they aren’t selling this as a money making opportunity they can’t pass up, but as an attempt to avoid a supposedly punitive new tax structure, a contention that’s pure bunk even in nominal terms.

Born in Southwestern Ohio and currently residing on the Chesapeake Bay, Brien is a former editor-in-chief of IIATMS who now spends most of his time sitting on his deck watching his tomatoes ripen and consuming far more MLB Network programming than is safe for one's health or sanity.

9 thoughts on “The luxury tax non-issue

  1. Norm

    Here's the deal as I see it. I know a lot of fans are distraught the Yankees aren't throwing money at each and every free agent out there. However, other than Josh Hamilton (who, IMHO, would have been a horrible fit for NYC), this was the worst free agent market in years. Sure, they could have resigned Russell Martin, but was he worth what the he got from the Pirates? I'm not sure. It's worthy to note that both Swisher and Soriano are still both unsigned. Bet Soriano is kicking himself he let Boras talk him into opting out of a deal that would have paid him a lot more than he can expect to get now.

    • mcmastro

      While i agree that this free agent class was pretty lackluster, I am rather upset they haven't tried to figure things out with Cano and Granderson. Because of the austerity it certainly seems like they won't even discuss contracts with those two, which is disheartening. Because of this my preference would be to trade them both if they both do not look resign-able next year ( I'm already pretty certain they won't resign Granderson). Yes, i know they would have a MUCH weaker lineup without those two in. Both they are both extremely interesting trade chips and i'd take a worse year in 2013 for a much brighter future. (Yes I'm a huge Yankee fan i am just also aware that sometimes thinking in the short term only is a horrible idea)

  2. Anon

    Um, most fans following the payroll reduction also look at the revenue sharing rebates, etc.

    With some fiscal sanity perhaps ticket prices can be positively impacted going forward. If not? They will still have $ for future signings, particularly given the lousy FA class this year.

    Norm: +1

  3. Georgie

    It is all relative. Will we know exactly how much money the Yankees made as an organization when all revenues are added up? NO! But I bet it's a great deal. When this team struggles to win 90 games and doesn't go anywhere, how much revenue will they lose? When the TV revenues fall because of this what are the long term effects. And merchandise?
    This business 101 management will take short term profits at the expense of long term glory.

    • chris

      I respect what they have done this off-season. As has been noted, this was a WEAK free agent class and players signed for WAY more than they should be getting. Yes, the Yanks may have a down year this year and even the next, but after that they will (likely) have a homegrown catcher (romine/sanchez maybe later), ss (Jeter will be there for at least the next 3 years), CF (gardner) and 2b (cano is going nowhere) with youngish pitching with Nova, Phelps, Pineda and Hughes. They will still have CC in 2 years and will look to sign pitching in a class that has Verlander and Kershaw among a plethora of good pitching and good fielders. After that, they shed Tex and will be much younger with the exceptions of Jeter and AROD and be much better. Spending now prohibits filling the right needs later.

      • Chris, I wish I had your confidence that Cano is going nowhere but I don't. Boras is going to get him paid, and the mindset that oversigned ARod is no longer around for him to take advantage of.

        • Allen

          I also wish I had your confidence in Romine, Sanchez, Nova, Phelps, and Pineda. I will be thrilled if even one of them plays up to his "potential."

  4. OldYanksFan

    "Jeter will be there for at least the next 3 years"
    Don't think so. 2014 is it.

    • brian

      Oh Jeter’s getting to 4,000 hits in yankee uniform…. it’s happening, and if people gave up on that because of the ankle injury that’ll just make the moment all the sweeter…

      however, he might be done as a SS after 2014… probly will be, but if they win the division the next two years and he’s a part of it… who knows

      simple rule for Jeter… the quality is great, hasn’t always been all-world.. but when it comes to quantity.. ALWAYS bet the over

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