What the Yankees can save by ducking the luxury tax

The Yankees’ season ended about three months ago, and they have yet to make a significant move. The club guaranteed Zack Britton’s 2022 option, but that decision came under deadline. Otherwise, the Yankees have let DJ LeMahieu, Masahiro Tanaka, Brett Gardner, and every other free agent hang out in the winter cold.

Word came down this weekend that LeMahieu has had it up to here with the Yankees’ attempts to slow play his market and force him to sign a team-friendly deal. New York’s MVP the past two years is now looking to speak with other teams, as the Yankees apparently haven’t moved much to close the gap between the two sides.

We all know why the Yankees have acted this way: the competitive balance tax. After moving past all three CBT thresholds last year to land their white whale in Gerrit Cole, the team has put austerity measures back in place, in an attempt to save money and reset their tax rates.

For some, I figure it’s easy to take this at face value. Why wouldn’t they want to save money? In an offseason that’s moved at a glacial pace everywhere outside of San Diego and Queens, why wouldn’t the Yankees play things slowly and see if they can bring their guys back at lower rates? Surely the enormous savings wrought by ducking the tax warrant the risk of stringing their free agents along.

Stopping to consider the actual penalties incurred by daring to breach the luxury tax, however, gives one pause. To call said penalties a drop in the bucket almost feels like a slight at both drops and buckets. Looking at what the Yankees stand to save by holding their players’ feet to the fire forces us to accept what teams are willing to do in order to save a relative pittance.

First, the fundamentals. For the 2021 season, the final one before the expiration of the CBA and thus the last one for which we have official luxury tax figures, the first CBT threshold stands at $210 million. Second and third thresholds stand at $20-million intervals above the first figure. The average annual value of player contracts, plus any buyouts, as well as the value of estimated player benefits, count against the threshold. The Yankees’ CBT payroll comes in around $180 million at the moment, which means they can spend roughly $30 million without incurring the wrath of the CBT.

Do the back of the envelope math, and those millions dry up quickly if the Yankees retain LeMahieu. All signs point to LeMahieu pushing for a $100 million guarantee across five years at a minimum. Even if the Yankees managed to wrangle LeMahieu down to something like a $18-million AAV, any deal for Tanaka would bring the club right up to the line. Re-signing both Tanaka and LeMahieu would almost certainly leave the Yankees without room under the CBT to even bring back Brett Gardner on a minuscule deal, much less take a flyer on a veteran arm to help shore up the team’s pitching depth.

Now, let’s envision a cheerier scenario, in which the Yankees meet LeMahieu’s demands and give him a $20-million AAV. Let’s also posit Tanaka decides to return, on something like a $13 million per-year deal. Add in Gardner at about $5 million a year, and throw in a generic veteran hurler at that $5 million rate too. Such an offseason keeps the Yankees’ stellar lineup intact while adding some pitching to a staff that could use dependable arms.

What would that cost the team? In this scenario, the Yankees’ CBT payroll would run close to $225 million, above the first threshold but below the second mark at $230 milllion. Teams that breach the first threshold incur a tax of 20-percent on any overages. However, teams that clear it in three consecutive seasons, as the Yankees would if they did so in 2021, incur a 50-percent tax. That means that the Yankees’ hypothetical tax bill of 50-percent on a $15-million overage would come in at a grand total of $7.5 million.

Staggering, I know. A team that ran a payroll over $250 million in 2020 and netted revenues in excess of $600 million in 2019 per Forbes stands to save itself enough money to sign a fifth-starter by ducking the tax. That handful of millions is what stands between the Yankees and simply re-signing the players that brought them so close to glory in recent years.

Even if the Yankees tried to earn the highest tax bill possible, the figures land at manageable levels. A $260-million payroll for three straight years would breach all three thresholds and incur every possible surtax. By my calculations, even those brazen efforts would bring a roughly $30-million tax — their first draft pick would also move back 10 slots. Compare this to luxury taxes in leagues like the NBA, where the Warriors stand to pay almost $300 million on a $150-million roster, a 100-percent effective tax. The luxury tax that MLB teams so carefully treat like a salary cap really doesn’t bring anything resembling an onerous penalty unless a team breaches all three thresholds for multiple consecutive years, and even then, it barely amounts to about a 10-percent tax on the club’s overall payroll.

Keep this in mind when the team’s brass appears to note the inherent virtue of resetting their tax rate. These are the stakes they’re playing for; a handful of millions of dollars here or there on a roster that costs hundreds of millions, for a company that’s approaching a billion dollars in revenue on an annual basis, one that’s already worth several billion dollars in total. That’s what holding the line on LeMahieu and Tanaka is about. A large-scale version of turning out the couch cushions in search of change.