Whether or not other teams like it, the New York Yankees dominate talk about baseball economics. They have especially dominated it this off-season because of their stated goal of staying under a $189 million payroll for the 2014 season.
They want to do that for luxury, or competitive balance, tax purposes. I’ll get into the details of the reason for their quest later – it’s all about tax rates – but first you should know that the Yankees are losing the fight with their own payroll.
With 15 players signed for next season as this calendar year approaches its end, the Yankees’ luxury tax payroll totals $190 million. The Yankees are good at arithmetic; they can add. That’s why they have talked a lot lately about $189 million being a goal, not a mandate, set by Hal Steinbrenner, the team’s managing partner and son of George.
Finding it impossible to stay under $189 million and remain a serious challenger for post-season participation, they have wanted to let their fans and the news media know that they do no not plan to sacrifice their chances for a division title or a wild-card spot over a few, or a lot of, millions of dollars.
Already over the tax threshold, the Yankees have to decide if they want to stay as close to it as they can so they can be in position to duck under it if the opportunity arises – the trade of a player, for example – or if they should just keep adding salary to fortify their post-season chances.
If a team is over the threshold, it’s over. If it’s over by $100,000 or $10 million, the team pays the tax. The difference comes in the form of the tax rate.
This year the threshold was $178 million. The Yankees and the Los Angeles Dodgers were the only teams to exceed it. The Dodgers, however, will pay a 17.5 percent tax on the amount over the threshold while the Yankees will pay a 50 percent tax.
The Yankees pay at the highest rate because last year they paid 42.5 percent. The Yankees always pay the highest rate because they always pay the tax.
According to Ron Blum of the Associated Press, who these days is the premier keeper of salaries and related matters, the Yankees have incurred $252.7 million of the $285.1 million in tax paid by all clubs over the past 11 years.
The Dodgers, the only other team taxed this year, were charged $11.4 million, a level where the Yankees would like to be instead of their 2013 tax of $28 million. That’s why they are striving to be under $189 million. If they can elude the tax man in 2014, their tax status in 2015 will revert to the beginning, meaning no matter how much they go over the $189 million threshold in 2015, they would pay only a 17.5 percent tax.
But as one management fellow said, “I don’t think they’re going to be under 189.” Then he added, “Their only chance is if A-Rod is off.”
He referred to the suspension Alex Rodriguez faces. That steroids-driven suspension poses a predicament for the Yankees, not that they have any control over the matter.
If Rodriguez were to beat the suspension and play, the Yankees would be a better team than they would be without him. Any team would be better having someone standing at third base than having a wide open space, which the Yankees would have there without Rodriguez.
If he plays, though, the Yankees couldn’t deduct the millions they wouldn’t have to pay him during a suspension.
At this point, I suspect the Yankees would prefer to have a healthy Rodriguez’s bat in the lineup than a suspended A-Rod on the bench.
Right now Rodriguez is a $27.5 million presence on the Yankees’ luxury tax payroll based on his 10-year, $275 million contact.
Unlike the regular payroll, which is made up of that year’s salaries and pro-rated shares of signing bonuses for players on the 25-man roster and disabled list, the luxury tax payroll consists of the average annual value of the contracts of the players on the 40-man roster, any bonuses they earn and the amount of player benefits with which each club is charged for each of its players. For 2014 that amount will be $11.6 million.
Besides Rodriguez’s baseball-leading figure, the Yankees have CC Sabathia’s $24.4 million, Mark Teixeira’s $22.5 million, Jacoby Ellsbury’s $21.857 million, Brian McCann’s $17 million, Hiroki Kuroda’s $16 million, Carlos Beltran’s $15 million, Derek Jeter’s $12.8 million, Ichiro Suzuki’s $6.5 million, Matt Thornton’s $3.5 million, Kelly Johnson’s $3 million, Brendan Ryan’s $2.5 million and Brian Roberts’ $2 million.
The values assigned to contracts for Vernon Wells (7 years, $126 million) and Alfonso Soriano (8 years, $136 million) are reduced by cash the Yankees received from the trading clubs. The Yankees are receiving $13 million for Soriano so his value becomes $4 million, and Wells’ contract works out to essentially zero.
Other players remain to be signed and their contracts will be added to the payroll. The biggest of those contracts will belong to David Robertson ($3.1 million last season), Brett Gardner ($2.85 million), Shawn Kelley ($935.000) and Ivan Nova ($575,000). The Yankees could also sign a free agent and make a trade.
When George Steinbrenner was alive and running the team, he would have cared not a bit about tax thresholds. Spending those extra millions would have been tantamount to dropping a few dollars into a Salvation Army bucket this week.
Son Hal might not walk past the bucket without throwing something in, but he’s not looking to spend wastefully.
By the way, the last time the Yankees had a payroll under $189 million was 2004. The payroll was $183 million. The tax threshold that year was $120.5 million.