Saturday, January 11, 2014

A-Rod Loses, Yankees Win

The biggest beneficiary of Alex Rodriguez's 162-team suspension? His employer.

It's partly because the Yankees won't be on the hook for Rodriguez's $25 million 2014 salary. But more importantly, the team has a shot at significantly reducing the "luxury tax" it pays. Because the Yankees' $234 million payroll exceeded the $178 million luxury tax threshold in place in 2013, they had to pay the league a $28 million luxury tax. The amount of the luxury tax is based on the amount by which the payroll exceeds the threshold times the luxury tax rate, which is set at 17.5% the first time a team exceeds the threshold and rises thereafter to a maximum rate of 50%. The Yankees are at the maximum, so paid 50% on the $234 million - $178 million = $56 million by which they exceeded the limit.

There are two keys to the calculation: The limit, which rises from $178 million to $189 million this year, and the number of consecutive years the team surpasses the limit, because that sets the tax rate. If a team gets below the limit, even for just one year, the luxury tax resets to the lowest rate.

The Yankees have stated a goal of getting below the limit, because then they won't have to pay a luxury tax in 2014 and their luxury tax resets the next time they exceed the limit. Let's say, for example, the Yankees' 2014 payroll is $189 million--right at the limit--and returns to $234 million in 2015. Then their tax rate would be 17.5% in 2015, 30% in 2016, 40% in 2017, and 50% in 2018. The total tax paid those four years would be $61.2 million.

On the other hand, if the Yankees' payroll is just $1 million higher, $190 million, it will exceed the limit another year, keeping the tax rate at 50%. So making the same assumption that the Yankees payroll returns to $234 million in 2015, the luxury tax paid 2015-2018 would be $90 million. Even for the Yankees, the difference of $28.8 million is a lot of money. (Look at it this way: It'll pay almost half of the $61 million the team still owes Rodriguez in 2015-2017!)

So why does the A-Rod suspension help them? Because suspended players don't count toward the luxury tax limit. After signing free agents Brian McCann, Jacoby Elsbury, and Carlos Beltran, getting the payroll down to $189 million was going to be a challenge. Removing $27.5 million (the average value of the nine-year contract Rodriguez signed before the 2008 season) helps a lot.

Granted, the Yankees now have a big hole at third. The Fangraphs depth chart lists Brendan Ryan, Kelly Johnson, and Eduardo Nunez as likely starters. Still, that hole will likely prove to be smaller than the hole in the team's wallet if they can't get below the luxury tax threshold.

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