2016 Luxury Tax Estimate

Last season, Major League Baseball levied a $26M competitive balance tax on the Yankees, better known as the luxury tax. The franchise has been the league’s top luxury tax contributor since the tariff was instituted, something team owner Hal Steinbrenner has clearly grown tired of. He’s sick of paying the piper, and doesn’t believe his club needs to maintain a payroll level that triggers the tax in order to win a World Series.

“I’ve said it over and over, I shouldn’t have to have a $200 million payroll to win a world championship,” Yankees owner Hal Steinbrenner said [in November 2015]. “It’s been proven over and over again, right?’’

One way or another, Hal is going to get his wish. The wheels are already in motion. In recent years, the organization has refused to sign pricey free agents and has plenty of salary coming off the books over the next two seasons. Plus, with a new collective bargaining agreement expected this winter, the allowable payroll ceiling before tax kicks in could increase. Under the current agreement, the maximum tax-free competitive balance payroll is $189M. Assuming there aren’t any other significant changes to the luxury tax rules, Hal’s come too far to change course now.

For no discernible benefit, I’ve put together an estimate of the Yankees’ 2016 luxury tax dues. This isn’t the first time I’ve put together such a calculation, but I believe that this is the most accurate one yet (so I hope). Below is an embedded Google Sheet for you to scroll through, beginning with the calculation’s summary tab built from supporting tabs. I’m not going to bore you with details of the computation, as most of the explanations are within the footnotes of the spreadsheet’s tabs. If the embedded Google Sheet doesn’t appear, you can view it here instead. After the embedded spreadsheet, I’ll offer some thoughts.

A few thoughts:

  • The roughly $26.4 tax owed is in line with last year’s payment. Entering the season, a higher bill was expected because of arbitration raises, the addition of Aroldis Chapman, and the swath of large contracts still on the books. That changed at the trade deadline – more on that in a moment. For a history of what the Yankees have paid to the league’s offices, Forbes’ Maury Brown has an excellent breakdown that also compares the Bombers’ liability to the rest of the league’s.
  • What’s most confounding about Hal’s goal is how it came about. For years, money wasn’t a concern. Team payroll has been at the top of the league since the late 90s dynasty. The re-institution of the luxury tax in 2003 didn’t deter ownership from spending. Undoubtedly, the franchise’s economic strength made it a perennial contender. Suddenly, in 2012, Hal decided it wasn’t working? That there was a better way? He’s not wrong about a team being able to win with a payroll under the tax threshold, but that’s not the point here. Why purposely not exploit the franchise’s greatest strength? The only evident beneficiary of this change in philosophy is the Steinbrenner family’s bottom line. Unless there’s something unknown at stake, the path the organization has taken over the last four years has been strange, to say the least.

Some parting notes on the calculation’s accuracy:

  • In all likelihood, the Minor League contracts for players like Anthony Swarzak  or Donovan Solano could have called for more than the pro-rated portion of the Major League minimum($507.5K) for any time spent with the Yankees. The organization has a history of using its financial muscle in the minor league free agent market, as erstwhile Fangraphs’ lead prospect writer Kiley McDaniel has noted. On Cot’s, I was able to see that Eric Young Jr. signed a Minor League contract with the Brewers for the pro-rated portion of $1M in the big leagues before he was traded to the Yankees. There’s no such information for any similar deals for the Yankees, so I defaulted to the minimum salary. It won’t materially alter the tax due, but it could be a piece of the variance from the final number.
  • When the final tax number is announced after the new year, the details of the calculation won’t be public. Because of that, it’ll be difficult for me to correct my estimate to see what I may have missed. In my prior comment, I noted one potential difference. Other differences I suspect are possible include my tally of service time for the players coming up and down from the minors. The Yankees’ transactions page is helpful, but who knows if it matches the league’s internal register. There are also other unknowns, such as performance incentives not noted on Cot’s and cash compensation in trades. Despite these potential shortcomings, and any other unforeseen ones, I do think this will wind up being pretty accurate. The gist of the calculation isn’t overly difficult. In fact, I made it more difficult on myself by attempting to calculate split salaries by service time. We’ll see.

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