Death and…

MLB announced luxury tax payments this week, and the Sox and Yankees were the only two teams contributing for 2010. The Sox contributed $1.5M based on about $177M in payroll and health expenses (22.5% on the $7M in money over $170M), while the Yankees paid $18M (40% on the $46M in money over $170M). So the team's payrolls played out like this, in total dollars:

  • Red Sox – $178.5M
  • Yankees – $234M

The Red Sox were hit by the tax for the first time since 2007. The Yankees reduced their tax burden from 2009 by a hefty margin but still managed to outspend the Sox by the GDP of Kiribati.

27 comments… add one

  • Not sure if the Kirabti comment was tongue-in cheek but it is the case that both teams outspent the nominal GDP of Kirbati! (which according to that link was $130 mil in 2009)

    sam-YF December 22, 2010, 9:42 am
  • I didn’t even know what Kiribati was before this post.
    It was meant to be humorous, if also mostly accurate!

    SF December 22, 2010, 10:37 am
  • Didn’t realize that the luxury tax was progressive, though it was a flat rate over a certain payroll amount. But I’m curious on the Sox 22.5%, while the math is correct, what I can find online doesn’t line up. Supposedly the 1st time a team goes over the luxury tax threshold the tax is 17.5% the second time the tax is 30% the third time it is 40%. Maybe there is another level I didn’t find.
    Interesting that this tax is not spread back to the team as I’ve always thought. The tax money is spent as follows: 50% of the remaining money is used to fund player benefits, 25% is used to fund baseball programs in developing countries with no high-school baseball, and 25% is put into the Industry Growth Fund (IGF) (source: Wikipedia)

    BillsBurgSF December 22, 2010, 11:05 am
  • This is insane.

    Brad December 22, 2010, 11:33 am
  • BBSF – I think teams get taxed at higher rates the more often they go over the threshold. So the Yankees are “repeat offenders” and are taxed at a higher rate.

    SF December 22, 2010, 11:41 am
  • I was a fan of Pete’s comment at the end of Peter Abraham’s blog post:
    Barring a deal to shed salary, the Red Sox almost certainly will go over that mark in 2011.
    Of course, purchasing Liverpool means the Red Sox will have to trade all their players by May 1 anyway. Everybody knows that. It’s a well-known financial principle that people can only own one business at a time or risk ruin.

    Paul SF December 22, 2010, 12:10 pm
  • “When we add in the AGon contract,… AGon – $180M”
    he signed? sweet!
    same time frame in yankeeland looks as such…
    jeter- $51M
    rivera- $30M
    cc- $161M
    tex- $181M
    aj- $82M
    throw in marte, martin, and pettitte…..
    but i like the guys on your list better.

    sf rod December 23, 2010, 3:50 pm
  • I know it’s tempting for sox fans to adopt the Enron-school-of-accounting when calculating total payrolls, especially at a time when the gap between the Sox and Yankees payroll figures has closed considerably, but that can not mask the fact that this statement:
    “So the team’s payrolls played out like this, in total dollars:
    Red Sox – $178.5M
    Yankees – $234M ”
    is just plain wrong.
    If it were correct, why was the 40% payroll tax imposed by the MLB on the Yankee TOTAL PAYROLL not calculated off of $234 million and the 22.5% tax on the Red Sox TOTAL PAYROLL not calculated off the $178.5m?
    Clearly, because these are not total payroll figures.
    The Competitive Balance Tax is calculated off of the AAV plus benefits plus extended benefits.
    By that yardstick, the Sox payroll for 2010 was $176+ million.
    The Yankees payroll for 2010 was $215+ million.
    No credible source for baseball salary figures calculates total payroll in such a way that it includes MLB-imposed luxury taxes.
    On opening day 2011, the Sox and Yanks payrolls will be even closer.
    You can not have your cake and eat it too – if the Sox are going to spend like drunken sailors just as the Yanks have done, no accounting jujitsu will be able to hide that fact.

    IronHorse (YF) December 23, 2010, 8:37 pm
  • Please, IH. When a team signs a player knowing that there will be a premium paid because of the luxury tax then their effective payroll is higher. This isn’t a tough concept nor is it unfair to look at it this way.
    If you know you can afford a two dollar hot dog when you pay a 40 percent tax on that hot dog, you know going in that your hot dog is effectively costing $2.80. My hot dog, since I buy it knowing that my tax is only 20 percent, is effectively $2.40.
    Decisions are made accordingly.

    SF December 23, 2010, 9:46 pm
  • I never said the concept was tough SF. Just that it was wrong. And I think it clearly is. I don’t know of any credible source for team payroll that incorporates luxury tax. Do you?
    On the other hand, if we adopt the logic that anything that goes into signing a player should be counted toward total payroll, then we can finally put to rest the question of whether the $51 million posting fee for Dice-K should be factored into the Red Sox payroll, right?

    IronHorse (YF) December 23, 2010, 10:10 pm
  • I don’t think it is “wrong”. Teams make financial decisions based on the cost of their players, and the luxury tax is directly related to payroll. So if a player is signed with full knowledge that their salary will incur a tax then it is fair to look at that salary in effective terms.
    With Matsuzaka his posting fee was excluded from any luxury tax considerations. His salary, on the other hand, would be fair game for me in this case. So for his 2007 salary, the last time the Sox went over, feel free to add a multiplier.

    SF December 23, 2010, 10:33 pm
  • SF, I’m honestly not trying to start a fight, but this just seems disingenuous to me. If you are making the point that teams factor in the luxury tax when they decide on what to offer a player, of course I would agree.
    But if you are going to put up stats about “total payroll” that don’t match the definition that any source for baseball payrolls uses – and in so doing exagerate the gap between the Sox and Yankees in a way that is favorable to the Sox – you have to expect to be called on it here.
    It’s the holiday season and I’m admittedly in a not very holiday-cheery mood right now so forgive me if I’m sounding snarky – I think I’ll turn off for the night and revisit tomorrow…merry christmas/happy chanukah/happy new year to all…

    IronHorse (YF) December 23, 2010, 10:48 pm
  • sorry sf, but you are clearly wrong here, just as IH is clearly right…you guys have hammered the point home to us time and time again that payroll is payroll, the rest, as in the cost of doing business, and specifically “talent acquisition costs” as i like to call it, is not included…if you can exclude the posting fee for dice k as has been conveniently done by sox fans here, then the tax should be excluded from pure payroll figures as well…nice try though to attempt to preserve the gap that has narrowed considerably this year…the sox are spending willy nilly…who woulda thunk?…some folks might call this trying to keep up with the joneses…in this case, it’s trying to keep up with the steinbrenners….

    dc December 23, 2010, 10:50 pm
  • My mistake was calling luxury tax amounts “payroll” in the top post. They aren’t. I should have been more clear.
    They are, to me, effective payroll. In that a cost to a team for a player, when they KNOW they will be paying a percentage levy on that player, is effectively higher.
    Seems like it isn’t me who is the one who is playing games here. If one buys a co-op apartment in New York and secures a really great interest rate, it would be disingenuous to run around boasting about how low those payments for housing were if the maintenance on said apartment was outrageously high. Both are factors in housing costs in NY, and to simply exclude one from the conversation because it isn’t “mortgage” is silly. Both costs relate to living expenses. In baseball, the tax levied on salary values is related to payroll. Any exclusion of it from the conversation seems to be done in the interest of glossing over the fact of its existence.

    SF December 24, 2010, 6:32 am
  • One last thing, because I don’t want this to degenerate into an us vs. them thing. This applies to the Sox. If they ink Gonzo to an “under-market” deal but go over the threshold again, then that deal isn’t so much “under-market”, and they would be advised (as would us SFs) not to tout it as such. If there are deals signed that end up, knowingly, costing 40% more than face value, the that deal is only under-market in as far as it makes the player more movable to another team that may not incur a tax. But the cost to the team is not so fantastic, in the end.
    As I said, this applies to the Sox at this point, who are over the mark.

    SF December 24, 2010, 6:47 am
  • “…They are, to me, effective payroll. In that a cost to a team for a player, when they KNOW they will be paying a percentage levy on that player, is effectively higher….”
    then so is dice-k’s posting fee…we agree then
    “…effective payroll”
    is that an accounting term?…i wasn’t a very good accountant, so that’s probably why i don’t remember that one…”payroll” is typically defined as compensation to employees [contractors weren’t considered payroll in my company, even though they performed the same work as employees in some cases…they were still a cost of doing business however and accounted for accordingly, as an expense]…payroll compensation typically includes wages, benefits, bonuses paid to employees in exchange for their work product/service…
    to me it always made sense to look at both components…payroll in the pure sense, and then the cost of talent acquisition…both the yankees and the sox now have become big spenders in this arena, and that can’t be spun any differently…it’s still a big spending gap, but it just narrowed some…

    dc December 24, 2010, 8:14 am
  • Ugh. Seriously, I made a mistake saying “payroll”, technically. But you guys are the ones splitting hairs here to alleviate something you are feeling, what I can’t guess – I am no shrink.
    Go to the hot dog analogy above, it still stands. Time to move on. I have to go buy an egg and cheese sandwich, whose taxes I will conveniently not count in calculating the money I have to spend towards the cost of the sandwich.

    SF December 24, 2010, 8:32 am
  • OK, so I asked my non-baseball liking wife and asked her opinion via email. She’s a CPA so I thought who better to ask.
    Here’s my email:
    As an accountant in your opinion should a “Luxury Tax” considered part of payroll?
    Each year MLB taxes any team that goes a threshold that they have set on team payroll. For example let’s say the threshold is $150 million. The Yankees payroll in 2010 was somewhere north of $200 million, so they are over the threshold set my MLB. If you were the Yankees team accountant would you count that “Luxury Tax” as part of the payroll or would you classify it as something else?
    Her answer:
    “Part of payroll”

    John - YF December 24, 2010, 8:55 am
  • SF, I will say though I think your hot dog comparison is off. I think it should go like this:
    I live in NJ. I like Hot Dogs. New Jersey has set up a Hot Dog tax. The state has said I can have up to 200 Hot Dogs in 2010 and if I eat anything over 200 I’d have to pay a luxury tax on. See NJ thinks 200 hot dogs is more than enough for anyone in one year. They deem anything over 200 as a luxury. In 2010 I ate 215 Hot Dogs. So I knew I’d have to pay the tax on those 15 Hot Dogs.

    John - YF December 24, 2010, 9:00 am
  • Thanks for the outside opinion John. But I am not even arguing on the technical, letter-of-the-CPA terms. I am considering this in conceptual terms – that when a team such as the Sox acquires a player with the knowledge that they may go over the luxury tax they consider the cost of that player in terms of their contract PLUS the amount of tax they pay on that contract. I really don’t understand the objection to this concept. We do it every day with our own purchases.
    Though it is gratifying to know that it might be technically appropriate, too!

    SF December 24, 2010, 9:01 am
  • Yeah it wasn’t easy telling you that you were right ;)

    John - YF December 24, 2010, 9:07 am
  • New Jersey has a hot dog tax? Chris Christie is gonna have a big ol’ bill.

    SF December 24, 2010, 9:17 am
  • I also asked her about posting fees and what it should be counted as and she said it would be very difficult (going purely by the book) to not include a posting fee as part of the payroll and as part of that players salary…This coming from someone who wouldn’t know Daisuke if he stepped on her.

    John - YF December 24, 2010, 9:25 am
  • The not-gray area is that a posting fee is tax exempt. A salary is not. But a posting fee is quite obviously an expense.

    SF December 24, 2010, 9:29 am
  • Either way, I don’t care. Arguing over (not that anyone is) how much our respective teams spend or are taxed is just wasted time. Somewhere a fan in KC is laughing at this entire conversation. I’d rather argue the projected stats for 2011, that’s way more fun!
    The Christie joke was funny SF!

    John - YF December 24, 2010, 9:34 am
  • far be it for me to argue with a cpa, but i’m not sure i buy the answer that taxes other than fica and income tax are “payroll”…oh well…no biggie…sounds like she did agree that if you include the luxury tax, you include the posting fee as part of the overall equation when examining the cost of acquisition…and that makes sense…
    “…But you guys are the ones splitting hairs here to alleviate something you are feeling, what I can’t guess – I am no shrink….”
    nice…but you sox fans, all of you, are the sensitive ones that always have to be right even in the face of cold hard facts, right?…i can recommend a good shrink…good friend of mine…humor ;)

    dc December 24, 2010, 10:46 am
  • Whether the difference in the two teams’ payrolls is $56 or more like $30 million, it’s silly to suggest that such differences are trivial, or imply that the two teams effectively had identical payrolls in 2010. Even the lower figure buys any team a whole lot of extra pitching and hitting.
    A common rejoinder is that having already spent well over $100 or $150 million, neither team can really improve over their “marginal” differences, so these added expenditures don’t really confer any real advantage. Uh-huh… Which is why the Sox adding Gonzalez and Crawford was no big news over the past month. Not.
    If $30-$56 million is seen as trivial in the context of a $175-$234 million payroll, then I’m sure various YFs will agree to send me checks for $2.34 (or $2.56) every time I send $2 to you. Assuming that’s cool, I’d like to make that deal several thousand times with each of you.
    But seriously: If $30 million or $56 million is trivial, then presumably Brian Cashman should have no trouble writing a check for half of either amount for Theo Epstein’s use to make the two team’s payrolls exactly even… because those extra tens of millions aren’t giving you any advantage, dontcha know.
    How about this modest proposal: The Red Sox and Yankees mutually agree to spend $200 million per year (either including or excluding luxury tax, it’s immaterial) for the next five years starting in 2012. Each will adjust its spending according over the next year to bring them in line. Then we’d have a level playing field and this argument could be set aside in favor of who is simply the better team.
    Would all you YFs be cool with that? Or is the truth that the $30 or $56 million difference *is* in fact an advantage with which you be loathe to part?

    Hudson December 25, 2010, 12:26 pm

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