Red Sox Shouldn't Fear the Luxury Tax

A lot has been made about the luxury tax for the Red Sox this offseason. Theo set it as a goal to stay under. Our offseason has even been declared largely finished by some based on our approaching and exceeding it. Given the fact that it increases the more years you're over it, our exceeding the luxury tax has even been considered a sign that we won't be able to spend next year.


In my opinion, though, it's just not going to make much of a difference at all.

 

 

Let's consider the worst-case scenario for the Red Sox tax-wise. I think we can, for the most part, agree that the Red Sox will not likely spend more than $200 million in 2011. The jump from last year to this year has been huge by itself. To see it increase significantly again would be unexpected, so even $200 million is a fairly out there number, but it's best to be conservative when talking about things like this, so let's call it $200 million.

 

First, it's important to understand that the Luxury Tax applies only to money spent over the cap.

 

Now, John Henry seems to have conceded that the Red Sox will, in fact, be over the cap for the coming sesaon. They already are by a relatively small amount, and there's not a lot of room for cutting payroll (maybe trading Jeremy Hermida, or revisiting the Lowell deal later). So, again, being conservative, let's say the Sox make some more minor moves and end up $10 million over the cap. Since they were over the cap in 2007 at the maximum rate, their tax level is at 30% should they exceed the cap again this year.

 

That's $3 million. To us, a large amount. To the Red Sox, less than 2% of their payroll. When your payroll gets up towards $200 million, money is going to be tight, but not so tight that $3 million is likely to make a huge difference.


So moving on to 2011. There has been some talk that the Sox would attempt to get under the luxury tax this year in order to break the bank in 2011. If the Sox were to stay under this year, their tax level in 2011 would be 22.5%, as compared to 40% if they're over in both 2010 and 2011. Again, going back to that $200 million figure, the Red Sox would be $22 million over the 2011 limit of $178 million. At 22.5%, the tax figure comes out to $5 million. At 40%, $8.8 million. While $8.8 million is certainly a significant figure, if we were expecting the Sox to really break the bank next year, then the only real difference between going over this year and not is $3.8 million next year. And this is the "worst case scenario". If they are only going to go over the tax more "incidentally", maybe ending up around $185 million, then the difference is relatively inconsequential.

 

The Red Sox do not have bottomless pockets. Certainly, the team is not the type to sell off players for salary relief (well, not anymore), but that's not to say they don't have limits. It wasn't even 2 weeks ago that sources suggested they were within $5 million of their payroll limits. But it seems ridiculous to, in the face of a sudden surge in spending, balk at the suggestion of spending a few million more. If we truly expect the Sox to go nuts in 2011, then it's unlikely that a few million will hold them back from grander plans. If we don't, then these issues probably won't apply to begin with. As is, the Sox are shedding roughly $25 million of useless payroll after 2010, and another $33 million in David Ortiz, Beckett, and Martinez (it adds up to around $50 million for tax purposes). Considering the luxury tax is up $8 million next year, the Sox will likely have plenty of room to work with even if they want to avoid that "worst case scenario".

 

So what does that mean for this year? Well, if we're at our budget limit, as sources say, then we're at our limit and there's not much that can be done. But if not, then the luxury tax should not be seen as some sort of final frontier that cannot be crossed when considering free agents like Adrian Beltre, or adding payroll in a trade (I will not mention any first basemen here). If there is real improvement to be made at a reasonable price, we shouldn't be worried about tax rate increases or a few million dollars in tax. It's not like signing someone to a bad, Lugo-like contract, after all. As soon as you're under, it all goes away.

 

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