Cutting through the Payroll Tax Crap

Much of what you have been hearing and reading about the Yankees' reason for reducing the payroll by 2014 is misleading, because much of the commentary merely regurgitates the Yankees' talking points. A typical example is the following:

   "If a team exceeds the luxury tax for their fourth straight year, it will pay a 50 percent tax on any overage, a huge figure that has clearly contributed to the decision-making of the team’s brain trust."

The Yankees want you to think that they are victims of onerous tax increases imposed by MLB's Collective Bargaining Agreement. But that is nonsense. The truth is that they are trying to cash in on a scheme straight out of The Producers.

Here's the deal. Suppose the Yankee payroll in 2014 is what it has been in recent years, around $210 million. Yankee Analysts did the math on that; in this scenario the Yankees luxury tax bill in 2014 would actually be lower than it has ever been.

This is because while the Yankees' tax rate will indeed increase to 50%, the salary cap will also increase. The rate alone does not determine how much tax a team has to cough up; the tax is paid only on the portion of team salary that exceeds that year's cap.

To illustrate how the Yankees' luxury tax is calculated, the following table shows the Yankees salary and luxury tax for 2009 and 2011:

   (dollar amounts in millions)

Season	Team Salary	Salary Cap	Taxable Portion (Team Salary - Salary Cap)	Tax Rate	Tax (Taxable Portion * Tax Rate)
2009	$226.2	$162	$64.2	40%	$25.7
2011	$212.7	$178	$34.7	40%	$13.9

Now let's look at 2014, when the Yankees' tax rate would increase to 50% and the cap to 189 million. If the Yankees were to have the same payroll in 2014 that they did in 2011, their tax bill would decrease by $2 million, from $13.9 million to $11.9 million:

   (dollar amounts in millions)

Season	Team Salary	Salary Cap	Taxable Portion (Team Salary - Salary Cap)	Tax Rate	Tax (Taxable Portion * Tax Rate)
2014	$212.7	$189	$23.7	50%	$11.9

The 50% tax rate increase is clearly irrelevant to the Yankees business model.

This instead is merely about another revenue opportunity for Hal Steinbrenner. The new Collective Bargaining Agreement adjusts how revenue is shared so that teams in large market but with poor revenues no longer get a share. The amount these teams would have gotten is instead refunded to the contributing teams, with one restriction that impacts the Yankees: if a contributing team has been over the salary cap 2 straight years, it does not get the refund.

The exact amount the Yankees would get out of this scheme depends upon various variables and details, but it has been estimated that they could get as much as $40 million in 2014, if they are under the cap.

So, in non-BS language, what is going on here is this: the Yankees found a way where they can make more money in 2014 by making their product - the team on the field - worse.

That is so messed up that it is worth repeating again: the Yankees found a way where they can make more money in 2014 by making their product - the team on the field - worse.


Note: I gathered salary and tax information from:

• 2014: A Payroll Odyssey; A Closer Look at the Yankees’ Cost Cutting Ambitions. This Yankee Analysts article provides a great, detailed explanation of the considerations.
• http://en.wikipedia.org/wiki/Luxury_tax_%28sports%29#Major_League_Baseball_.28MLB.29
• http://espn.go.com/mlb/story/_/id/7381414/new-york-yankees-boston-red-sox-only-teams-hit-luxury-tax
• http://articles.nydailynews.com/2010-12-22/sports/27085081_1_luxury-tax-payroll-joba-chamberlain