Yankees to Cut Payroll; An End of an Era?
by Jan Stransky and Tyler Wasserman | Field of Ignorance
Perhaps the era of big-money teams dominating the free agency market is about to come to a close, at least to a certain extent. The managing general partner of the New York Yankees, Hal Steinbrenner, announced last week that the franchise plans to cut its payroll all the way down to $189 million by the start of the 2014 season. This means the Yankees, who in 2011 had a payroll of $202 million, will have to reduce their total payroll by $13 million in just two seasons. Since the introduction of the luxury tax in 2003, the Yankees have paid $206 million of the $227 million collected by the league, slightly over 90%. The team is looking to eliminate their luxury tax expense all together by 2014.
The new collective bargaining agreement, which goes into effect this season, is the primary reason for the sudden luxury tax concern. First of all, the luxury tax threshold is currently $178 million. It will remain the same for 2012 and 2013, and will rise to $189 million for 2014, which is the Yankees’ target. Getting the payroll down to $178 million by 2013 is very unrealistic, so they are aiming to not pay luxury tax in 2014.
Under the old collective bargaining agreement, first time luxury taxpayers paid 22.5% of the amount over the threshold, second time payers paid 30%, and third time payers paid 40%. Any subsequent seasons over the threshold remained at a 40% tax. However, in the new CBA, the first time tax decreases to 17.5%, the second time and third time rates stay the same, and the fourth and all subsequent times increase to a 50% tax on overages. But the key difference is that under the new CBA, if a team gets under the luxury tax threshold, they are treated as a first time payer the next year that they exceed the threshold. Under the old structure, if a team was over the threshold, then got under it, and exceeded it the following year, they would still be treated as a second time payer.
The Yankees will now have to pay a 50% tax on any amount over $178 million in 2012 and 2013, since they have been paying luxury tax every year for the past decade. Until they get under the threshold, they will be paying 50% on all salary exceeding the luxury tax threshold. However, if they can manage to get the payroll down to $189 million in 2014, the benefits go beyond simply not paying luxury tax in 2014. In 2015, they could go back over the threshold and be treated as a first time payer, paying 17.5% rather than 50%. This is the key to the Yankees’ thinking. They are still going to spend, but they will now be very mindful of that luxury tax penalty.
The purpose of this site is to analyze the value of players and teams, and whether money is being spent efficiently or not. A few months ago, Jan conducted a study to see if the amount of money a team spends actually correlates to a team winning the World Series. The conclusion of that study was that money provides teams with an immediate advantage, and there is a high probability that teams among the highest in the league in payroll will win the World Series. However, ultimately there are many variables that decide who wins that last game of the season. And now, even Hal Steinbrenner has come to realize that: “Plenty of teams win without the kind of payroll we have.”