The Boston Red Sox are clearly a “have” organization in Major League Baseball. Being a “have” however doesn’t mean that you can literally “have” whatever your heart desires or that you “have” no budget or parameters around which your team must be constructed. Sure those limits are self-imposed by the current ownership group, but let’s not forget, they own the team and fiscally responsible for its management. They have purchased — literally — the right to set those parameters to the bounds of their comfort level or desired profit margin. One such parameter currently in the focus of the media, the fans and the organization is the luxury tax threshold. But what does that all mean and how does it effect the 2010 Boston Red Sox or their approach to the upcoming trade deadline?
To wit, this isn’t meant to be a column about whether the Red Sox should be cautious with respect to their finances/payroll or not. Better said, I am not looking to argue either side of the “how much money should this team spend” argument. I mean, it’s not my money right? I will wade far enough into the context of those waters to dissolve my bias with respect to the money and business decisions being made on Yawkey Way by saying I don’t believe this franchise to be cheap in any way. I would go so far as to say that being consistently in the top five in Major League Baseball gives you some slack to work with.
I think the current Red Sox ownership walks the fine line of committing resources to the product that fans pay to see on the field in an appropriate and responsible fashion to both the fans and the investment group to which they are beholden. At the same time, are there times where I think their lack of aggressiveness has bitten them? Yes — Mark Teixeira is case #1. I think they could have been more aggressive and chose not to out of a sense of fiscal responsibility that they could have stretched. You could even argue that the Red Sox first dance with one Alex Rodriguez was a casualty of the same tendencies. So would I like to see them open the purse a little larger at times? Yes. Do I expect them to spend recklessly? No.
So if we can agree that like it or not, ownership of a team includes setting the financial guidelines under which it is managed then we can dig into the parameters that are currently creating boundaries that current General Manager Theo Epstein is constrained by — namely, the Luxury Tax.
Baseball has no salary cap. Instead it has a “Luxury Tax” or Competitive Balance Tax that in effect sets a salary threshold over which teams will be financially penalized against the excess their payroll is over it. The penalty for going over the threshold scales as a percent each consecutive year that a team is above the bar starting at twenty-two and a half percent with a cap of forty percent — known as the Yankee Tax.
The payroll threshold is set annually* and will be $170 million in 2010 — very close to the $168 million payroll the Red Sox started the 2010 season at.
*Luxury Tax levels by year
2003 – $117m
2004 – $120.5m
2005 – $128m
2006 – $136.5m
2007 – $148m
2008 – $155m
2009 – $162m
2010 – $170m
2011 – $178m (estimated)
Since the 2004 season, only three teams — the Yankees, Red Sox and Detroit Tigers — have crossed the Luxury Tax threshold and paid money into the leagues kitty as a result. The Yankees, whose payroll consistently tops $200 million, have paid nearly $25 million dollars a year in taxes to the league. The next highest amount paid by any team was $6 million paid out by the 2006 Boston Red Sox.
Recent reports claim that the 2010 Red Sox have been informed that they are in fact already over the $170 million dollar threshold meaning that they will pay 22.5% of every dollar above that level to the league this season and are in position to be in the 30% tax range if they cross the $178 million dollar level in 2011, which is likely given the upticks in salary to many of their core players.
It’s easy to see why the Red Sox ownership would want to use the Luxury Tax threshold as a de-facto budget. Who wants to spend any money whose impact goes unrecognized by the team directly?
How does this impact the 2010 trade deadline? It has been reported by Fanhouse and backed up by Nick Cafardo that the Red Sox are very cautious about crossing — or further crossing — the $170 million dollar threshold. Given these parameters, it certainly seems like Theo’s primary goals this trade deadline will be to shore up the bullpen without taking on any net payroll. Would you be disappointed if the Red Sox fell back on the Luxury Tax as a reason — or excuse — for not being more aggressive in taking on talent and payroll the remainder of this season?