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)

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.

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.

21 thoughts on “The luxury tax: still meaningless

  1. 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. 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.

  3. 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.

  4. 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.

  5. 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.