The luxury tax: still meaningless

I know I’m getting into dead-horse territory with this point, but as long as people keep not getting it I feel like I’m going to have to keep saying it. Here’s Tanya Bondurant of Pinstriped Bible, talking about Plan 189 in light of Ken Rosenthal’s report on the revenue sharing refund pool yesterday:

If the team realizes that they may not end up with as much financial relief as they thought, could they be willing to just scrap the plan all together? A potential 50% luxury tax penalty is incredibly high, and the team would be smart to do everything they can to avoid throwing that extra money away, but would the money saved be worth it if they field a team that fails to be competitive? I don’t think the goal of $189 million is a myth, but I do think it could easily be thrown out and forgotten if the front office doesn’t see enough monetary benefit from suddenly needing to pinch their pennies.

Emphasis mine.

There are really two points I want to make here. First of all, it’s probably best if everyone just give up on trying to figure out what set of circumstances might get the Yankees to give up on Plan 189. At the end of the day ownership is after higher profits, so the budget cutting itself is a heck of a big step in that direction, and the CBA enticements, however lucrative they wind up being, are just icing on the cake.

Secondly, and more importantly, you need to remember that the initial reaction to recoil in horror at the prospect of a “50% tax rate!” is just sticker shock. A 50% tax sounds prohibitive, maybe even downright crazy, which means that, like all things that sound mildly insane, you should search for the caveat. And the caveat with the luxury tax is that, a) it only applies to money over the “cap,” and b) that cap is going up by $11 million along with the higher tax rates. That second factoid is so pertinent that if the Yankees were hit with the crazy 50% luxury tax rate last season their luxury tax bill would have actually been lower than the bill they paid at the lower rate, as $11 million was taken out of the calculation.

That’s not to say that dipping below the luxury tax threshold and resetting the rate isn’t a good goal to work towards over the long haul, especially if it’s accomplished by not handing out unnecessarily large contracts to Alex Rodriguez and Rafael Soriano or giving more of their young prospects a chance to play. That’s a very different strategy than the one they’re employing now, however, which is to force a bloated payroll below a certain target as quickly as possible for maximum financial benefit to ownership. From a baseball standpoint we’re already well past the point of logical decision making here (it’s not like the luxury tax rate can’t be reset in 2015 or 2016 if the team can reach the mark then), so the hope that the front office won’t tolerate a season or two without a playoff berth to get there strikes me as wishful thinking more and more everyday.

(For more/stronger remarks on the Steinbrenners, be sure to give last night’s podcast a listen)

21 thoughts on “The luxury tax: still meaningless

  1. jerkblog

    hear hear! Though most people in real life can barely understand marginal tax rates, which is why they are against tax hikes on those rich, job creators we hear so much about. Expecting people to take the time to learn about it for something less important than real life is such a stretch.

    Continue the great effort, and maybe people begin to ask: "What was the rate before? (42.5%) How much more would they have to pay? (Actually they'd pay less)" when articles toss around this stuff about the increased tax rate.

  2. uyf1950

    Let's do a simple math exercise. Based on their NEW fiscal philosophy say the Yankees get under the tax threshold in 2014 right at $189MM. The in 2015 they go back up to a payroll of $215MM. The Ysnkees would pay NO luxury tax for the 2014 season and 17.5% tax for the 2015 season on the difference between $189MM and $215MM or a tax of about: $3.4MM +/-.

    Now consider if the Yankees chose to forget about that and had a payroll of $215MM in both 2014 and 2015 their tax rate each year would be 50% on $52MM the amount over the threshold for the 2 years combined. They would have a total luxury tax bill of: $26MM

    Now I don't know where everyone comes from but from where I stand the difference between paying $3.4MM versus $26MM over 2 years is pretty substantial even for someone I would think with a lot of money.

    • jerkblog

      The comparison isn't between paying no tax, because that requires cutting payroll which is asinine for a team that makes as much money as the Yankees, but between the current tax rate vs the 'new 50% tax rate!!'

      42.5% on 178 threshold is more than 50% on 189. Its about 3 million more with the 42.5% rate. The actual tax penalty, which you have calculated over 2 years, is conservatively only 2% of revenue.

      • BrienJackson

        Also, it's lacking context. That $22.6 million difference would only be 5% of their total payroll spending over those two seasons. That's not nothing, but if it winds up being the difference between being a World Series contender and missing the playoffs, how much is 5%, really?

        • uyf1950

          Brien, my comment is only lacking context IF you assume the Yankees can't field a "competitive" caliber team on a payroll of $189MM. I would contend that is an assumption that is yet to be proven. I would suggest at that payroll the Yankees could field a competitive team that is capable of making the postseason and once that happens anything can happen. It just becomes a matter of which team gets hot at the right time. Witness the 2011 Cardinals. As we all know the team with the largest payroll more often then not doesn't even make it to the World Series. I firmly believe it's not how much you send but how you spend it. At least that's my opinion.

          • Seems like a far better assumption than not, frankly.

          • uyf1950

            Well I guess if Hal and Company go though with their plans to get under the Threshold Tax for 2014 we won't have to make that assumption very long. We'll find out before the 2014 season is over. I hope I'm right and you're wrong about their postseason chances then.

      • uyf1950

        My friend, I disagree. The choice isn't between what the Yankees are currently paying versus what they would pay in 2014 if they made no adjustments to their way of approaching their payroll. The choice seems to me it's have a payroll of about $215MM in 2014 and beyond or get under the tax threshold entirely for 2014 and reset the the tax rate down to zero from what it currently is and would go to otherwise at 50%. And based on those options the savings over a 2 year span 2014 and 2015 would be over $20MM. That's just my opinion.

        • jerkblog

          But this whole article stems from the fact that the 50% tax rate, the marginal increase of the tax being applied, is what is pushing ownership to now cut payroll. That is why I think the better comparison is as I laid out.

          If the Yankees were interested in saving money, they could simply keep payroll at 215 and pay less overall than in previous years. They are already paying less luxury tax than the maximum levels they have paid in the past (high 20s).

          The big problem is that 'getting under for 2014' is NOT the plan. It is 'get under and stay under', which is really crappy for the richest team in baseball to do.

          • uyf1950

            Let's face it what makes getting under the $189MM luxury tax a difficult task is A-Rods contract. He counts for $27.5MM of what would be the $189MM threshold . And that's not counting the "milestone incentives" that also can figure into the tax calculation. Take A-Rods $27.5MM AAV figure out of the calculation and the $189MM target number is not that far out of reach. For example say the Yankees payroll is $215MM take out $27.5MM for A-Rod and the Yankees payroll drops to $187.5MM. Now consider the Yankees have 2 starting pitchers Pettitte and Kuroda) and a closer that come to $40MM +/- and it's not inconceivable that going forward the Yankees could sign 3 quality players to fill those spots for less then the $40MM it will cost the Yankees in 2013. I realize what I've presented is an overly simplistic view of the payroll situation. But I think it makes the point that if not for a couple of very big/poorly timed contracts the Yankees really aren't that far off from the $189MM tax threshold and fielding a competitive team. That's just my opinion.

  3. Allen

    Cutting payroll for 2 years affects more than just those 2 years. What is the long term impact of losing a franchise player like Cano? Sure it might save them $20 million, but they will be left with a sub-par offense for several years afterward. With the competition the Yankees face, that could cost them several trips to the post-season, which represents much more than $20 million in lost revenue. Not to mention declining YES viewership with a subsequent decline in ad rates and revenue.

    • uyf1950

      My friend to a degree I agree with you. I would pose the following though. What is the long term impact of signing a player like Cano to a absurd long term contact where in all likelihood he is only productive for say the first 4 years of it? I can tell you you need look no further then a few of the contracts on the Yankees books today (A-Rod and to a slightly lesser degree Tex). Please forgive me the following is just my opinion. Is Cano worth $20MM plus a season? SURE. Is he worth $20MM plus a season for 8, 9 or 10 years? ABSOLUTELY NOT.

      • BrienJackson

        I still don't understand why people are kicking around the possibility of a 10 year contract for Cano like that's a thing that might actually happen.

        • uyf1950

          I did qualify my comment by saying 8, 9 or 10 years. I included 10 years because I've read on more then 1 occasion where Boras has thrown around that number for the length of an agreement he would be seeking for Cano. Will he (Boras) be able to get 10 years for Cano probably not but then again I never thought he would have been able to get 9 years for Prince Fielder. But I do think their will be more then 1 team out there willing to go 8 years on Cano especially IF he has a decent 2013 season. And that's what concerns me. It concerns me that the Yankees might feel or find themselves boxed into a corner and extend Cano a contract that is to long.

  4. Allen

    You can't sign superstars if you aren't willing to guarantee them a couple of extra years. That is part of the cost of being in the game – just think of it as deferred money. Cano is one of the best hitters in the game, and he has earned the contract that is coming to him.

    • uyf1950

      My friend no question he is one of the best hitters in baseball today. And that may even be true for the next 4 or 5 years. But at the start of the 2014 season Cano will be 31 years old and to think he will be one of the best hitters in baseball at the age of 35 or 36 is foolhardy. Never mind offering him even an 8 year deal that pays him in the neighborhood of $20MM plus per year when he is 38 or older is ridiculous. You can think of it as deferred money if you like but that $20MM plus per year comes right off the top of a teams $189MM payroll for MLB Luxury Tax purposes. That's just my opinion.

      • Allen

        So in your opinion the Yankees should never sign a superstar? Because every single free agent superstar gets extra years.

        • uyf1950

          My opinion is the Yankees should not extend guaranteed contracts of more then 6 years to any player who is going to be 31 years old in the 1st year of that contract. I can see in certain circumstances a 7th year vesting option but a team or vesting option only.
          If some other team wants to roll the dice that a "supposed" superstar will be productive into his late 30's let them take the risk.
          When MLB and the MLBPA allow player contracts to be more incentive laden I'll be all for longer contracts,. But as long as contracts are guaranteed regardless how a player performs I stand by what I said at the start of this comment.

        • uyf1950

          Allen my friend. Just a point of reference I believe A-Rod was only about 7 months older then what Cano will be when he signed his 10 year deal with the Yankees at the end of the 2007 season I believe. Alex was twice the player then that Cano is today. Do you honestly believe that if the Yankees knew then what they know about Alex's drop off in performance of late (past 2 or 3 years) that they would have signed him to a 10 year guaranteed deal or even a 7 year guaranteed deal? Because I don't. I'm reminded of a saying "those who forget the past are condemned to repeat it".

  5. B.Y.

    Dodgers recently got 8 BILLION tv deal from time warner which changes the landscape imho. If the Yankees don't want to follow the formula that made them a success, so be it.

    • uyf1950

      Is it just me. But what success have the Dodgers had in the last 20 plus years. During all that time they have not won a single World Series title. The have only participated in 5 postseasons losing in the NLDS in 3 of those years and losing in the NLCS the other 2 times.
      If by success you mean the new owner(s) being fortunate to buy the Dodgers out of bankruptcy when MLB forced Frank McCourt to sell the team because of martial problems. Also the new primary owner was able to use the money from his insurance clients to pay cash for the Dodgers. Also, having the good fortune to have their TV deal with FOX expire at just the right time for them to negotiate a new deal.
      But as far as success on the diamond the Dodgers are sorely lacking there.

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