The Effects of the Luxury Tax
The Effects of the Luxury Taxin Welcome to the Forum ! Wed Aug 23, 2017 10:48 am
by jackky • 23 Posts
Major League Baseballs general managers are meeting in Palm Springs, Calif., now, which kicks the Hot Stove burner from simmer to medium-low. The burner will turn to high the following month at the Winter Meetings in Nashville.
Even on simmer, there is word from the Bronx the Yankees wont pursue big time or perhaps le s-than-big-time free agents this winter season, despite rotation and outfield needs. We can debate whether to accept the word from the Bronx as true or just a Mike Mitchell Jersey negotiating ploy. What we do know is that this: Yankees owner Hal Steinbrenner has stated repeatedly that he really wants to bring the Yankees below the $189 million luxury tax threshold in 2014. Why? Well, that takes some explaining.
The luxury tax is a shorthand term for the Competitive Balance Tax provisions in the Collective Bargaining Agreement. It imposes a problem on teams with player payrolls above a set threshold. The tax is levied only around the portion of a teams payroll that exceeds the predetermined amount. The luxury tax was first introduced within the 2003-2006 CBA and it was designed tokeep player payrolls from skyrocketing, without setting a tough salary cap.
The current CBA covers the 2012 through 2016 seasons and sets the next payroll thresholds for every year:
2012:$178 million2013: $178 million2014: $189 million2015: $189 million2016: $189 million
So, for instance, if a teams payroll for 2012 was $185 million, that team would be taxed on $7 million ($185 million $178 million). But whats the tax rate? That will depend. The rate is a sociated with a teams luxury tax history. When the team wasnt a se sed a tax in the prior season, then the tax rates are 20%. When the team paid the posh tax this year in a 22.5% rate, then your tax rate for 2012 is 30%. A 30% luxury tax rate this year would yield a 40% rate for the same team in 2012. And a 40 Brad Wing Jersey % luxury tax rate in 2011 would mean a 42.5% rate in 2012. For the seasons 2013 through 2016, the initial rate falls (from 20% to 17.5%), the 30% and 40% tax rates stay the same and the 42.5% rate shoots up to 50%.
Which brings us to the Yankees and it is 2014 payroll.
The Yankees have paid the luxury tax every season since the taxs inception. In 2011, the Yankees tax rate was 40% optimum rate underneath the previous CBA. That means the teams tax rate in 2012 is 42.5% and will be 50% in 2013. But if the Yankees keep payroll below $189 million in 2014, it not just avoids the tax that season, it lower the teams luxury-tax rate for 2015 to simply 17.5%. Thats right, avoiding the posh tax for just one year re-sets a teams tax rate to the lowest underneath the CBA. Byron Stingily Jersey For the Yankees, the main difference from a 50% tax rate along with a 17.5% tax rate is significant.
By steering clear of free agents looking for more than one-year deals, the Yankees are well-positioned to obtain underneath the $189 million threshold in 2014. They has only three players under contract in 2014 CC Sabathia, Alex Rodriguez and Mark Teixeira and while those three players add up to greater than $70 million in salary, thats still under 40% from the luxury tax threshold.
But why don't you just sign free agents to backloaded contracts? Well, the Yankees could, but it wont help them on the tax front. Thats because multi-year contracts are given a typical annual value (AAV) for a se sing the luxury tax, meaning an agreement that requires $10 million in Year 1, $12 million in Year 2, $15 million in Year 3, and $20 million in Year 4 counts as $14.25 million toward the threshold each season. Signing bonuses will also be added in to figure out a contracts AAV.
Then theres the problem of options. My colleague Eric Seidman explained this i sue more than at Phillies Nation in a discu sion about Cole Hamels contract extension:
Both vesting and club options areexcludedfrom the calculation, while player choices are factored in. If your vesting option vests or a club option is exercised, the wages are treated like a one-year deal for that luxury tax. Addititionally there is the problem of timing: Leterrius Walton Jersey If an extension is worked out before a current deal expires, the contracts are consolidated.
Ryan Howardis an ideal illustration of said consolidation. He was signed to some 3 yr/$54 million contract, and then signed his monster 5 yr/$125 million contract. Speculate he signed the five-year pact prior to the initial deal expired, the posh tax views his contract as 6 yrs/$143 million, to have an average annual worth of $23.8 million. That can be a is a little a price reduction in accordance with the 5 yr/$125 mil deal, it means the Phillies paid almost $6 million more for Howard when calculating luxury tax payroll last year.
But wait, theres more!
To determine if a team exceeds the tax threshold, you must do more than simply add up the AAVs of major-league agreement for that season. Under the CBA, each teams payroll also includes a 1/30th share of player-benefit costs: such things as contributions to the pension plan, workers compensation premiums, spring training allowances, moving expenses and player medical costs. For 2013, each 1/30th share is valued at $10,799,590. That figure will rise in 2014 and beyond.
For years, the luxury tax might have been called the Yankees-Red Sox tax, as the above teams were the only ones that consistently exceed the threshold limits. By being repeat offenders, the Yankees and Red Sox faced escalating tax rates. That Dermontti Dawson Jersey s why the Yankees are trying to draw the road for 2014.
Thats not the case for that La Dodgers.
New owners spent $2.15 billion to acquire the Dodgers from Frank McCourt earlier this year after which poured millions more into the team with the trade for Adrian Gonzalez, Josh Beckett, Carl Crawford and Nick Punto last August. EPSNs Jayson Starkwrote yesterday the Dodgers 2013 payroll already exceeds $180 million which team is seeking further upgrades, whether by trade or free-agent signing. If so, the Dodgers will trigger the luxury tax the very first time next season, leading to a 17.5% tax the difference between $178 million and the teams final payroll. According to Stark, the Dodgers dont appear to be the least bit worried about paying an extravagance tax. They want to be develop a perennial winner, and when it takes spending within the threshold in 2013 and later, so be it.
Sounds familiar, huh? Thats precisely the way the Yankees did busine s for years. Now, 10 years after the luxury tax was set up, the Yankees are showing financial restraint. If the Dodgers will spend and invest Ten years without concern for that luxury tax remains to be seen. Until then, it seems the Yankees have ceded the large money powerhouse label towards the Dodgers. Well, a minimum of until 2015.
RE: The Effects of the Luxury Taxin Welcome to the Forum ! Thu Aug 24, 2017 6:16 am
by HYst • 84 Posts
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