Contemplating the Yankees’ future with the luxury tax

As part of the 2002 CBA, MLB instituted the modern luxury tax system as we know it. The Yankees would quickly become quite familiar with the tax, exceeding the first threshold for the first 15 years of the system’s existence, paying out over $300 million in the process.

A curious development arose in recent seasons, however. In 2018, with the Baby Bomber Era in full flight and with the team suddenly anchored by a foundation of young (read: cheap) talent, the Yankees casually slipped under the luxury tax for the first time in history. Three years later, in 2021, the Yankees had another opportunity to dip under, should they avoid any big free agent signings, and dip under they did, resetting their penalties for the next time they would pay the tax.

The saying goes: “Two is a coincidence, three is a trend.” Faced with more chances to add big talent for big money on the free agent market last offseason, it appeared we’d get to see whether the Yankees were about to make a real trend out cycling beneath the tax. It’s something I considered last winter when the Yankees were rumored to have interest in star shortstops like Carlos Correa or Corey Seager. I reasoned that in taking on any of the top players at the position, the Yankees would effectively nullify any chance they had at getting back under the luxury tax for the near future, rendering their recent cycle of dipping under the tax more coincidence than trend.

Of course, the Yankees did not ink a star infielder last year. But now, in the midst of a much more aggressive offseason from the Yankees, one that’s pushed their payroll higher than ever before, it’s once again appropriate to ask: was the Yankees’ dance with the luxury tax an aberration?

While the Yankees’ roster doesn’t look that much different now than it did three months ago, the club has had to go to some lengths to make it that way. Aaron Judge re-signed on a deal that will average $40 million per year, as did Anthony Rizzo on a $20 million AAV deal. Carlos Rodón required $27 million annually in exchange for his signature, while Tommy Kahnle pulled up the rear with a two-year deal that averages $5.75 million.

Per Roster Resource, that lands the Yankees’ estimated luxury tax payroll (which includes things like estimated arbitration salaries, the cost of player benefits, and payments to the leaguewide pre-arb pool) at about $291 million, nearly $60 million past the first threshold. The Yankees will undoubtedly pay the tax in 2023 and will likely sit past the third tax threshold, after exceeding the second threshold in 2022.

How does the Yankees’ splurge this winter impact their longer-term luxury tax outlook? Well, it essentially leaves them in the same situation that signing Correa or Seager to a long-term deal last year would have.

Here’s a look just at the guaranteed contracts the Yankees have on the books for 2024 and beyond, and the luxury tax hit associated with those deals (payroll projection includes salary guarantees and cost of player benefits, but not arbitration projections):

The Yankees’ free agent outlays this year, combined with previous commitments to Giancarlo Stanton, Gerrit Cole, Aaron Hicks, and DJ LeMahieu, already leave them with a nearly $200 million luxury tax payroll for 2024,. That sits about $40 million from the first threshold for 2024. The Yankees are forecast by MLBTR to pay out $50 million in arbitration this year, so just paying next year’s arb class will almost certainly put the Yankees into the tax for a third year in a row.

In essence, we already have an answer. The Yankees are all but locks to pay the tax over the next two years, at the very least breaking this small cycle of dipping under every third year.

Looking even further, the Yankees already have over $170 million loaded onto their luxury tax payroll for 2025, with just six players under contract. Consider the fact that one of those players is Hicks, and the other a 35-year-old Stanton, and it’s entirely plausible that the Yankees will have guaranteed that money and in the process only secured four starting-caliber players. Unless they fill out the rest of their roster almost entirely with pre-arb and arb talent, ducking the tax even three years out would seem like a tall task.

Most of us at PSA have pretty consistently made our feelings known on the Yankees’ relationship with the tax; it should hardly be a consideration for a team that generates half a billion in annual revenues, and that sees its franchise valuation sky rocket decade over decade. But the club itself in recent years has been concerned with the tax, and thus we must analyze their position from that lens.

And given where the Yankees’ most recent free agent foray leaves them, I’m personally feeling encouraged that the team is leaving its dance with the tax in the past. Maybe the boos over the summer got to Hal Steinbrenner, or maybe a free-spending crosstown rival has inspired the Yankees to try to keep up. Whatever it is, the Yankees have acted much more like a Fully Operational Death Star this winter than they have in years, and its put them in a position where they are likely to pay into the tax for years to come.

We can’t definitively declare the Yankees’ recent payroll cycling an aberration and rest assured that the evil empire is here to stay. It’s impossible to predict what management and ownership will prioritize years down the line. But from here, the trend is in a positive direction, at least from the perspective of those that want the Yankees to act like The Yankees.