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There is no reason for the Yankees to reset the luxury tax penalty

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The team’s recent business in free agency reveals their true motives this winter: ducking the tax. Here is why you should not be on board with this.

New York Yankees Introduce Masahiro Tanaka

The Yankees hot stove is officially lit. Ownership pulled off a major coup last Friday, keeping DJ LeMahieu in pinstripes for the next six years while also bolstering the rotation by signing Corey Kluber on a one-year deal. While there is business to be done yet to address the still-vulnerable pitching staff, the Yankees took a huge step to improve their championship odds for the coming season.

Mostly lost in the noise of all the fanfare was the apparent confirmation of the organization’s ultimate goal this winter: avoiding the first threshold of the Competitive Balance Tax (CBT). The additions of LeMahieu and Kluber bring the payroll to somewhere around $204 million, about $6 million short of the $210 million threshold that would qualify the Yankees as third-time offenders, and therefore be subject to the most severe tax penalties. On the surface this seems like a savvy business move, but do not be fooled, the avoided penalties are nowhere near as limiting as the team would have you believe.

Last week, my colleague Jake Devin articulated a comprehensive analysis into what the Yankees stand to gain by resetting the luxury tax. He concluded that even if the team exceeded the $210 million threshold by $50 million — giving them a $260 million payroll and placing them firmly in the highest tax bracket — for three years running, their annual tax bill would come out to roughly $30 million, still less than the yearly salary drawn by Gerrit Cole.

Jake is spot on when he states that the $30 million penalty is a drop in the bucket for an organization that prints money — to the tune of around $600 million in revenue yearly. However, if there is anything that Hal Steinbrenner has shown us since he took the reins, it is that, given the choice between paying money or saving it (see Ellsbury, Jacoby and Happ, J.A. for two) he will usually choose the latter. The problem is that investing more money in the roster, and thus accruing a larger luxury tax bill, by no means guarantees success in the postseason. So a financial argument for exceeding the luxury tax is doomed to fall on deaf ears.

However, that does not mean there are not equally legitimate arguments to abandon the priority of ducking the tax. Many of these center around the expiring Collective Bargaining Agreement (CBA) and the ensuing uncertainty. The current CBA ratified by the owners and the union expires after the end of this coming season, and player compensation figures to be the central pillar of talks.

There is uncertainty regarding every aspect of the upcoming negotiations. Will there be a work stoppage? Will the luxury tax system continue or might they switch to a hard cap/floor model? Will repeat offender status carry over or will teams’ slates be wiped clean?

All of this uncertainty serves to refute the Yankees’ attempt to duck below the $210 million threshold in order to reset their tax rate. There is absolutely no justification to pursue this course of action when there is no guarantee that their repeat offender status and corresponding tax rate will rollover into the next CBA. If the system is modified to a capped model, or if a strike ensues, the slate would be wiped clean, in which case the Yankees will have constrained their spending — and by extension winning capability — to reset a tax that was going to be reset regardless.

Stubbornly sticking to this frugal mindset wastes years of a finite championship window. Many of the Yankees’ top contributors are on team-friendly deals, but that will not last forever. Given the alleged losses that owners around the league are claiming due to the shortened 2020 season, there is not a better opportunity to take advantage of a slow market to ink one-year deals that come off the books and allow you to reset the penalty next year.

Make no mistake, DJ LeMahieu’s deal represents a win for the Yankees and a win for DJ, but a loss for players overall. Spreading out the total value across an extra year explicitly satisfied the goal of reducing the AAV and thus hit to the payroll, and reinforces the notion that meeting a budget was and is the winter’s number one priority. That the richest team in the game is prioritizing avoiding a tax above all else is unacceptable. And for Yankees fans, this definitively proves that it is time to abandon any notion that winning a championship is the ultimate mission statement.