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How the proposed luxury tax levels might affect the Yankees

Although a new deal has yet to be reached, we have enough of a framework for the Competitive Balance Tax to begin pondering its implications.

New York Yankees manager Brian Cashman at Spring Training Photo by J. Conrad Williams, Jr./Newsday RM via Getty Images

For Yankees fans, arguably the biggest question surrounding the new Collective Bargaining Agreement has been the Competitive Balance Tax, more commonly known as the luxury tax. In recent years, the Yankees have treated the luxury tax as a quasi-cap, one that sometimes they were willing to exceed (as they did to sign Gerrit Cole after the 2019 season), and sometimes one that they treated as an NFL-style cap (as they did in 2021 when they traded Luis Cessa to the Reds in order to shed Justin Wilson’s $2.85 million salary).

With major free agents like Carlos Correa and Freddie Freeman still available and a large extension for Aaron Judge looming — or, quite possibly, a smaller but sizeable one for Joey Gallo — it’s easy to see why the CBT is particularly relevant in Yankees Universe at the moment.

Lost amidst yesterday’s news that the league unilaterally canceled more games — after the owners suddenly decided that an international draft was the singular most important topic in the negotiations — was the fact that a major breakthrough had been achieved. While, technically speaking, the two sides have yet to agree on what next year’s tax will be and how exactly it will grow over the course of the CBA, both MLB and the MLBPA are finally within spitting distance of each other

In fact, the two sides are within $2 million dollars for the 2022 value:

At the very least, even if these numbers are not final, they are close enough (at least for 2022 and 2023) to allow us to break down how these moves affect the Yankees’ short-term payroll. Let’s start by looking at where the Yankees payroll for 2022 currently stands, according to Spotrac:

Assuming that the Player Benefits and Minor League Contracts remain roughly accurate, the Yankees currently sit between $6-9 million under the luxury tax for the upcoming season.

While this, obviously, is not enough to sign a major free agent — or anyone, really — without exceeding at least the base tax threshold, recent behavior suggests to me that, when trying to predict the Yankees’ actions, we should not necessarily look at the payroll in any given year; instead, we should look at the history of the Yankees paying the luxury tax:

Data above from Baseball Prospectus

As can be seen from this chart, after paying the tax for the entirety of its existence, the Yankees have established a very definitive trend over the last five years: dipping under the threshold temporarily in order to reset the penalties for repeat offenses, and then exceeding it for a couple of seasons. The decision to avoid the tax is completely unrelated to baseball concerns, even though the heaviest tax thresholds in the past CBA were not all that staggering. The team decided to get under it for the 2018 season despite coming one win away from the World Series in 2017 and acquiring Giancarlo Stanton via trade, and again in 2021 despite underachieving in the shortened 2020 season.

Expiring contracts are a more reliable predictor of the team’s behavior in sliding under the tax. After 2017, CC Sabathia’s $25 million, Alex Rodríguez’s $21 million, and Michael Pineda’s $7.4 million came off the books, which, combined with the decision to dump Starlin Castro’s $10.8 million in the Stanton trade and Chase Headley’s $13 million, allowed the Yankees to reset the penalties despite adding Stanton’s $22 million.

Three years later, the Yankees had James Paxton’s $12.5 million, Jacoby Ellsbury’s $21 million, DJ LeMahieu’s $12 million, Masahiro Tanaka’s $22 million, J.A. Happ’s $17 million, and Brett Gardner’s $10 million come off the books. Although LeMahieu returned for a slight pay raise and Corey Kluber’s $12 million deal replaced Paxton’s, the team used most of that money — along with Adam Ottavino’s $9 million, which was traded to the Red Sox — to bring the total payroll below $210 million.

Based off this pattern, the total salary in any particular season doesn’t matter all that much, as the team is clearly willing to spend money over the tax when they believe an addition is important: the Yankees invested heavily in Happ and the bullpen to build their pitching depth going into the 2019 season, while Cole was a big addition for a Yankees staff that needed a lockdown ace after Luis Severino missed almost all of 2019 with injuries. What reigns in the spending is instead flexibility; the Yankees clearly don’t want to pay what they deem to be excessive amounts of repeat offender penalties. Signing big contracts, therefore, is perfectly acceptable, so long as it does not prevent the Yankees from dipping under the tax for a year if the opportunity presents itself.

So where do the Yankees currently stand when it comes to guaranteed contracts? As of now, the Yankees have two massive contracts ending after 2022: Zack Britton’s $14 million and Aroldis Chapman’s $17.5 million. Meanwhile, Judge, Gallo, and Gary Sánchez are all hit free agency for the first time. In fact the Yankees currently have only $98 million in guaranteed money (when calculating for the tax, that is) for the 2023 season, though arbitration and increases in the minimum salary will obviously raise this figure. Severino has a team option for the 2023 season and Aaron Hicks one for 2026, while 2027 will see the end of LeMahieu’s, 2028 Stanton’s, and 2029 Cole’s. Although the Yankees have a lot of money tied up long-term, there is some flexibility there, especially if the team diverts the “cap space” used for Britton and Chapman into an extension for Judge.

Assuming arbitration figures do not rise significantly over the course of the CBA, either the league’s or the union’s proposal hypothetically gives the Yankees room to add another large contract while still keeping the team within striking distance of the thresholds. Of course, it remains to be seen how the Yankees might use the extra space, as they might instead find it more profitable to spread that money around to multiple players. That, however, is a question for another day.