The utter failure of baseball's luxury tax
If you're a Yankees fan frustrated by the team's slow start this season, you can blame one of two things: You can either rail at the plague of injuries that has robbed the team of Curtis Granderson, Mark Teixeira, and Derek Jeter, or you can point the finger at New York's budget plans for 2014, as the Yankees try to pull a fast one on Major League Baseball.
There's one number that guided the Yankees' offseason: 189. As in, if the team can get its payroll under $189 million for 2014, it will save millions in the luxury tax, MLB's penalty for the rich. So the big-spending Yankees made a commitment to pinch pennies like never before, spending as little as needed to stay competitive for 2013, and leaving the team with little depth at many positions.
The luxury tax was created to ensure parity in baseball. But this offseason, in which the Yankees exploited loopholes and the Los Angeles Dodgers spent like drunken sailors, showed just how toothless the tax is.
Created in 2003, the luxury tax was an imperfect solution to a persistent problem: How do you keep baseball's richest teams from spending whatever they want to stockpile all the available talent? MLB decided to set a payroll threshold, then charge a tax on teams that exceeded it. That tax would increase every year a team stayed over the limit, theoretically keeping teams from grossly outspending their competition year after year.
Because that threshold is rather high (it started at $117 million in 2003 and is at $178 million for 2013), few teams have to worry about the tax. In 10 years, only four teams have ever paid the luxury tax. One of those four teams, of course, is the Yankees, who have had to pay every single year since the tax's creation. And under the new collective bargaining agreement, the penalty is going to get worse.
Beginning in 2014, repeat offenders would have to pay 50 percent of any amount spent over the limit. For the Yankees, that means a lot of money out of their pockets just for luxury taxes. But there's a giant loophole: The Yankees can escape this cycle of financial penance simply by getting under the luxury tax limit once. If New York can do that, its luxury tax penalty resets to just 17.5 percent.
Thus, the historically open-walleted Yankees became tightwads. Long-term contracts were practically outlawed. Contract extension talks with Robinson Cano, their best hitter, have gone slowly, as the Yankees have refrained from simply throwing gobs of cash at him like they did with past stars. At one point during free agency, the Pittsburgh Pirates, a team with a payroll a third of New York's, outbid the Yankees for catcher Russell Martin, a core member of last year's squad. Anything and everything has been and will be done to get under that $189 million line.
Of course, the idea that the Yankees suddenly can't afford to spend anything more is ludicrous. This is a team with an estimated value of $2.3 billion and 2012 revenues of $471 million, according to Forbes. Last year, the team sold 49 percent of its stake in YES Network, its regional sports TV station, to FOX for a staggering $3.4 billion. The Yankees could turn a profit with a payroll twice what it is now. Their luxury tax shenanigans are nothing more than a naked attempt to save a few bucks so they can rocket past the limit again when the fetters have been removed. Is that really leveling the playing field?
You could argue that forcing New York to spend only into the troposphere as opposed to the stratosphere is a good thing for the competition. But the Yankees have never had an issue forking over extra cash to lead the league in spending by millions, and are only taking advantage of this opportunity in 2014 to get under the limit so they can go back to lapping the field in 2015 and beyond.
But the Yankees aren't even the worst luxury tax offenders anymore. Out on the West Coast, the Dodgers have taken spending to insane new heights. Backed by a new ownership group that paid $2 billion for the team, and a regional TV deal paying them a colossal $8 billion over the next 25 years, Los Angeles has decided to do everything it can to buy a title, luxury tax be damned.
In the 12 months since the new owners took over, the Dodgers' payroll jumped from $114 million to $239 million. That includes nine-figure deals for superstars like Zack Greinke, Adrian Gonzalez, Matt Kemp and (in the very near future) Clayton Kershaw. And the team has shelled out while publicly thumbing its nose at the luxury tax, insisting that the owners will spend whatever they want to spend and pay whatever needs to be paid to bring a championship to the City of Angels.
On the surface, that dedication to spend any amount of money to acquire what makes the team best is admirable. But it flies in the face of the idea of the luxury tax and competitive balance. If a team is simply so rich that the luxury tax means nothing, what parity is really being created? And as other teams grow ever richer thanks to lucrative TV deals of their own, how long will it be until they realize that the luxury tax is but a minor obstacle if they want to win?
MLB created the luxury tax to try to regain control of spiraling contracts and payrolls through spending limits that kept things fair. But those limits only matter if they're actually respected. And for the Dodgers and Yankees, those limits were made to be broken.