December 22, 2011

Lower Taxes

The Yankees luxury tax fell to $13.9 million. The Yankees lack of moves this year may be a further way of lowering that tax level. They are facing a whopping tax rate in a couple of years if they don’t get under the payroll limit, but if they do, the tax resets. I’m guessing their going to be bringing along a number of farm hands until that reset, then go on a giant spending spree.

6 thoughts on “Lower Taxes

  1. ptodd

    Their tax rate is already 40%, another 10% down the road should not scare them. 13.9 million is peanuts with their revenue. The potential loss in revenue should they have a poor season would dwarf that. It was a miracle how that rotation performed last year, and miracles don’t happen every year, and they still did not go very far in the playoffs.

    Something else must be going on. Me thinks collusion of some sorts, Maybe the Red Sox and Yankees have been promised less revenue sharing in return for compliance with the luxury tax threshold. Revenue sharing is the real Big Hurt. If so, it becomes more of a hard cap and the MLBPA dropped the ball (again).

    That said, I think it is good for baseball if the Red Sox and Yankees spend less than they can afford to, all else being equal. Of course, the players would prefer more revenue sharing to even out the playing field (with strings that forced teams to spend it on players).

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  2. Jesse R

    @ptodd: I think Dave makes a great point in his post when he states: “I’m guessing [they’re] going to be bringing along a number of farm hands until [the luxury tax resets], then go on a giant spending spree.”

    There is little reason for the Yankees to spend more money, making the luxury tax even higher, when they have a good enough team to make the playoffs. Yes, I consider Colon and Garcia’s performance last year to be a bit unexpected, but their regressions should be offset by the return of a healthier Hughes, a full year of Nova, and possibly a better AJ Burnett (okay… that last one is wishful thinking). Don’t forget A-Rod should be healthier and Jeter should be better (if we are to assume he struggled from the stress of 3000 hits instead of age).

    Fiscally, with the tax going DOWN, they will save what is equivalent to a TOP-LINE starting pitcher. Posada’s contract is gone, same for Kei Igawa. Mariano Rivera’s contract expires after this season, and there’s great speculation that he will retire. That’s a LOT of money coming off the table from just those three. Their payroll for 2011 was 216 million, 2012 should be (roughly– to be honest I don’t know who’s come and gone in smaller dollars) 200 million. If Mariano leaves and they stay roughly the same with everyone else in pay, it goes down to 185 million. With the cap extending to 189 for 2013, it’s very possible that their 2013 payroll could be at 185-188 which is under the threshold, resetting their penalty to 0 for 2013 (assumed savings compared to spending 216 million: 13.5 million for 2013).

    They will, of course, spend spend spend that off-season and be penalized in 2014 (duh, it’s the Yankees), but it will only be 17.5%. At that amount, it would save them ~10 million if they go back up to 216 million (which would be an increase of ~20 million in payroll at that point). That 23 million they save (luxury tax dollars only) in just two years would essentially pay for a 3 years or so of penalties (or, all of that ~20 million extra payroll added!). If you want to add in the money from purely spending less, you’re also looking at about another… ~30 million as well. That’s a lot of speculation and grasping at numbers that are all assumed, I’m well aware, but you have to figure that’s their short term slash long term plan. However, if that’s what they end up doing, in a matter of 2-3 years, they end up saving 53 million. That’s a crazy amount of money they’ve just saved, just by spending less over the course of 2-3 years, to get under the salary tax cap for ONE YEAR.

    This is a financial move for the future, and the Yankees have been pretty good at that in terms of business (YES, for example, has been a brilliant move and cash cow).

    Competitively, it doesn’t really hurt them too much in the playoff picture. With the added playoff spot, their odds increase and they don’t need to win as many games. For example, in 2011, if the rule was in effect, the Yankees could have posted a record of 87-75 and still made the playoffs. That’s 10 LESS wins than they posted in 2011.

    In 2012, I expect 89-73 to be good enough for the 2nd wildcard spot (my prediction is that either Boston or Texas will nab that last spot at 88-74).

    As for what you hypothesized, you are 1/2 right on suspicious of collusion and promises of less revenue sharing payments. It’s not collusion, because if the Yankees/Red Sox are below the luxury tax, they WILL receive back some of the revenue sharing dollars they spend– and that’s part of the CBA. It will be next to nothing, I would expect, but some is better than none. You are not wrong on guessing that they would lose money in revenue if they had a poor season. However, they would have to have a REALLY BAD SEASON to see a loss in revenue. Basically, they would have to be out-of-contention bad. The Yankees are the Yankees and will draw a crowd as long as they are in the playoff picture– which as I pointed out, should be easy to accomplish. Yes, winning more playoff games = more money, but there’s NO WAY that they would be able to turn more of a profit by continuing to be punished by the cap than by reducing payroll.

    TLDNR: Yankees are going to save a lot of money if they bring their payroll down, which will only lead to them being able to spend more, making this a very smart long-term move.

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  3. Kevin

    These athletes should care about there future. I’ve read a book “From Athletics to Business” it talks about Why do so many athletes end up in financial ruin? and I think I’m the wrong person to read that up. These guys should do some homework.

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  4. Ed

    There is also the issue that the free agent pool the last two seasons has been mediocre in terms of addressing what the Yankees need (mostly starting pitching). Better to save the money for when there is a stronger selection.

    Rivera’s departure will hurt the Yankees, however, simply because the replacement will almost certainly not be as good. I hope they try converting one of the their current starting pitchers or use one of their current middle relievers than to go the free agent route.

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