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.

About Brien Jackson

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. 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.

  2. 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. 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.