Yankees Set Another Record: Highest Luxury Tax

September 16, 2013 — Leave a comment

Fact: the New York Yankees are a record-setting club.  No team comes close to their 27 world series championships or their American League leading 40 Pennant titles and total games won (9,767).  Their  players include Babe Ruth, who held the home run record for nearly 40 years (714) and Joe DiMaggio, who still holds the MLB hitting streak record (52).  The Bronx Bombers have also had the most MVP award-winning players (22).

Off the field, the Yankees are the first team to break a $200 million payroll and have been league leaders in opening-day payroll for the last decade.  The team also includes the highest paid player in baseball, Alex Rodriguez, who has played in less than 25% of games this season and now faces a 211 game suspension for prior use of PEDs — another would-be-record.  Their impressive spending habits recently awarded them yet another title: the highest ever charged luxury tax.

The Yankees payroll is currently $236.2 million, according to salary records obtained by USA Today Sports.  As repeat offenders, the Yanks will have to pay 50% on its combined player salaries above the $178 million threshold, which amounts to a $29.1 million tax. That’s the same size as the entire Houston Astros payroll.

As Billy Beane said in the baseball book turned movie, Moneyball, “there are rich teams and there are poor teams, then there’s fifty feet of crap, and then there’s us.”  That’s probably how the Astros feel right about now.  Thanks to an interactive from the LA Times, I was able to generate this graphic, which shows how the salary of each position player on the Yankees (left) dominates their counterpart on the Astros (right): Screen Shot 2013-09-16 at 1.04.48 PM

This is what the salary matchup will look like when the Astros (51-98) play the Yankees (79-71) in the final three games of the season.

Any team could feel insignificant to the Yankees spending power though, even their disabled list has a higher payroll then half of MLB teams.

Understanding the Luxury Tax

In professional sports, a luxury tax is one method of preventing teams in major markets from having excessively high payrolls and/or signing all of the available talent.  The tax, also known as a competitive balance tax, is levied on the amount of aggregate payroll above a threshold set by the collective bargaining agreement (CBA) between the players union and the owners.  For every consecutive year a team pays the tax, their rate goes up, hence why the Yankees have to pay 50%.

Unlike the NBA, revenue collected from the luxury tax is not distributed to the rest of the league, but is divided among pre-defined purposes including player benefits, the Industry Growth Fund, and funding for initiatives such as starting baseball programs in developing countries.

MLB does not have a salary cap, but does have a revenue sharing arrangement where money from media contracts and merchandise sales is distributed from large to small market teams.  Despite this system and the luxury tax, the MLB still has the largest payroll disparity of any other major American sport.

The Yankees have paid the luxury tax each year since its adoption by the CBA, contributing over 95% of the funds.  This year, the Dodgers will join them and three others as the only teams to ever pay the tax.

The Yankees hope to move their payroll below next year’s $189 million threshold, but it will be tough to shed off $50 million from a roster locked up to expensive miscue contracts like Mark Teixera’s $22.5 million and A-Rod’s $29.1 million.

And if this year is any proof, money doesn’t always buy baseball glory.  Six of the highest paid teams are expected to miss the playoffs:

The Phillies ($159.5 million), Angels ($143.3 million), San Francisco Giants ($141.2 million), Toronto Blue Jays ($125.8 million), Washington Nationals ($120.6 million) and Chicago White Sox ($116.7 million) all are on the verge of elimination.

JDKatz: Attorney's At Law

JDKatz, P.C. is a full-service law firm focused on tax lawbusiness and transactional lawestate planning and elder law. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys, or visit http://www.taxattorneymd.com.

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