The luxury tax non-issue

If you haven't listened to last night's podcast yet, you should totally do that. In the meantime, I'd like to pull out a point that was made by Rob Abruzzese of Bronx Baseball Daily about the luxury tax that I think deserves a special level of recognition. In case you haven't heard, the Yankees were just hit with an $18.9 million luxury tax bill this season, with a taxable payroll of $222.5 million. That means that the combined expenditure was a pretty daunting $241.4 million. So considering that, it's no surprise that the Yankees want to avoid paying a punitive 50% luxury tax rate, right? Well there's just one problem with that: the Yankees tax bill would actually be lower under the system they're so desperately trying to avoid.

How is that possible? It's simple: While the rate the Yankees will be taxed at will go up, the luxury tax threshold is also increasing from the $178 million mark it currently sits at. Since the luxury tax is applied marginally (which means that it only applies to spending above the threshold, not the entire payroll), that higher tax rate will be applied to a smaller amount of spending. Assuming the same $222.5 million taxable payroll, the new tax structure would have left the Yankees with a bill of $16.75 million, or $2.15 million less than what they paid under the current, lower, rate. That's still a lot of money in the grand scheme of things, but it's a number they've proved to be willing to spend in the past, and it also assumes no gradual reductions in payroll at all.

Of course, that $2.15 million savings is also a much smaller number than the $40-50 million they could stand to make through a combination of payroll cutting, tax savings, and revenue sharing rebates, so it's still easy to see why ownership is hell bent on cutting spending. But they aren't selling this as a money making opportunity they can't pass up, but as an attempt to avoid a supposedly punitive new tax structure, a contention that's pure bunk even in nominal terms.