Revisiting the 2012 Luxury Tax Situation

In a two part series written last month, I discussed in detail the Red Sox’s current luxury tax situation for 2012, 2013 and beyond.  Now that the vast majority of slots on the 25-man roster have been filled, and arbitration figures have been shared, I thought I’d take another look at the situation for 2012 and examine how it may have changed.

Since we last talked about the luxury tax, the Red Sox have made the following moves:

• SP Kyle Weiland and SS Jed Lowrie were traded to the Astros for RP Mark Melancon.
• RF Josh Reddick, 1B Miles Head, and P Raul Alcantara were traded to the Athletics for RP Andrew Bailey and RF Ryan Sweeney.
• SP Aaron Cook, SP Carlos Silva, and SP Vicente Padilla have all been signed to minor league contracts that include invites to Spring Training.

While these moves aren’t major (at least in comparison to last year’s blockbusters), they’ll certainly impact both the gross and luxury tax payroll calculations.  Furthermore, Cook, Silva, and Padilla are all on minor league contracts, so the major league value of those contracts (should they be added to the 40-man roster) could also have an impact as well.  In all likelihood, only one of them will be added to the roster, but it’s still something we need to keep in mind.

First, let’s take at the Red Sox’s guaranteed contracts to get a feel of where they’re at right now before the remainder of the contracts are decided via the arbitration and “reserve clause” processes.

As it currently stands, the Red Sox already have $144.95M in guaranteed contracts committed toward the 2012 luxury tax.  Keep in mind that this figure could change depending on if the Red Sox decide to exercise John Lackey’s 2015 option, either later this spring or some time in the future.    If the front office is deliberate and choose not to exercise the option before Opening Day, their luxury tax figure jumps to $147.62M.  While it might seem obvious to pull the trigger now to lower the 2012 luxury figure, the impact is significantly lower if the club will breach the $178M threshold regardless.

Now, let’s take a look at the contracts that have yet to be agreed upon.

For the sake of simplicity, I estimated not only the contracts for Tazawa, Melancon, and Doubront, but also the 13 minor league players that aren’t being projected for the 25-man roster.  The minor leaguers will be given a luxury tax value of the league minimum, $480,000.

Regarding arbitration, the Red Sox will likely not have to go to arbitration with all or even any of these cases.  The club didn’t face an arbitrator during the entire time Theo Epstein was GM, with all cases ending in mutual agreement.  Things may change now that Ben Cherington is at the helm, but I get the impression that the goal is the same: avoid going to arbitration at all costs.  If a case does have to go before an arbitrator, the option of a compromise will not exist.  One side will win, and the other will lose.  Since it’s a high-risk/high-reward proposition for both sides, usually only the most extreme cases make it that far.  Due to the wide disparity in salary figures, David Ortiz’s case has a fairly good chance of being heard by an arbitrator.  In most cases though, the two parties will take the next month and work diligently toward finding common ground.  When an agreement is struck, it frequently results from the two sides splitting the difference between the “offered” and “requested” salaries.  As a result, it’s probably a safe bet to assume that the total cost of the unresolved contracts will likely fall in between the $25.81M and $32.97M figures.

Based on my calculations, the Red Sox will end up with a luxury tax payroll somewhere between $170.76M and $177.92M.  These figures depend on several factors including arbitration results, John Lackey’s option, and the status of Cook, Padilla, and/or Silva come Opening Day.  As it stands right now, I have them roughly $80,000 under the luxury tax threshold.  This isn’t a great position to be in if you want to pick up another “sure thing” to fill out the rotation like a Roy Oswalt.

If the Red Sox were firmly over the tax threshold (at $180M), I wouldn’t see any problem with the front office ponying up the dough to sign a pitcher like Oswalt.  That said, if their payroll ends up being closer to $171M, it might almost behoove them to stay the course, and look to make a move at the July 31st trading deadline.  Either way, Oswalt probably won’t be available when the arbitration dust settles in mid-February.  The front office is going to have to pick a course and stick with it.  Still, at one year, they wouldn’t be putting themselves in danger of affecting their situation in 2013.