If you’ve ever played a game of Monopoly, then chances are you’ve paid the “Luxury Tax,” a nice little docking from your wallet for landing in between the two richest properties on the board.
For the Yankees, every baseball season since the tax was instituted in 2003 has paralleled that scenario, as they’ve been forced to pay the tax for having their payroll exceed whatever the threshold has been set at. The Yankees plan to stem that tide come 2014, when the tax threshold is set at $189 million and some of their top prospects are closer to the Majors, but for now, it’s business as usual.
So what does this have to do with Brian Cashman’s winter 2012-13 shopping list?
Josh Hamilton, that’s what.
As you may have read, USA Today writer Bob Nightengale Tweeted the following this morning:
The #Yankees, but not GM Brian Cashman, quietly running background check on Josh Hamilton, rival GM says
— Bob Nightengale (@BNightengale) December 7, 2012
Throughout the winter, Hamilton has been purported to get an expensive multi-year deal somewhere…but since reports broke of the Yankees’ link, many in the social media universe have asked why the Yankees don’t either offer someone like Hamilton a huge one-year deal (as in A-Rod money), or just structure a front-loaded contract (again, like A-Rod’s) so that they pay less money in the future.
Answer: The Luxury Tax.
In the long-term, it matters not because the luxury tax isn’t a one-year qualifier. For one-year deals, yes, what you see is what you get – but for players under long-term contract, the “tax hit” is calculated using the average annual value (AAV) of the guaranteed money remaining as its base number, similar to the NHL’s salary cap.
Basically, what that means is that if a player was signed to a two-year, $10 million deal, his value against the tax threshold is $5 million in both seasons – regardless of how the actual money is paid out. For example, Alex Rodriguez’ contract says he will make $29 million in 2013 and $26 million in 2014, but his tax hit in both years will be $27.5 million, because that is the AAV of his deal ($275 million divided by 10 years).
So, even if the Yankees signed someone like Hamilton to a contract that is front-loaded (or even back-loaded), their tax hit would be the same every year no matter what.
In the short-term, there’s two dilemmas. For one, the Yankees know they’re going to pay the tax again in 2013 for sure; the threshold is set at $178 million and the Yankees have over $150 million worth of “tax hit” invested 10 players (plus what they owe Pittsburgh for A.J. Burnett), so it’s almost inevitable that the final 30 who fill out the 40-man roster will push them over the threshold.
But secondly, the tax percentage actually increases this year, which means that the Yankees could pay more than ever before. This year, teams who exceed the threshold for at least the fourth time will pay a 50 percent penalty – a steep raise from the 42.5 percent the Yankees will pay for 2012; that means that for every million dollars they exceed the threshold, they will pay $500,000 in tax on it.
Translation: If they gave someone like Hamilton a one-year, $20 million deal, it would eventually cost them $30 million in actual dollars.
And so, what you’re left with is Brian Cashman and the Yankees brass in perhaps their most challenging off-season so far, trying to find the balance between adding the right pieces and keeping the future payroll manageable enough to meet the $189 million goal in 2014.
And you thought baseball was just a game?
Follow Lou DiPietro on Twitter: @LouDiPietroYES
