Fear The Tax: How Baseball's Luxury Tax Could Effect The Red Sox This Off Season

Last year, the Red Sox committed to spend over $300 million on just two players. This off season with the Winter Meetings in the rear view mirror, there is no sign the team intends to take out the check book. They still may, but yesterday, Ken Rosenthal of Fox Sports speculated that the team's passivity may be due at least in part to their proximity to Baseball's luxury tax. Rosenthal obtained figures from another organization that show the Red Sox are currently up against the luxury-tax threshold of $178 million. (Nick Carfardo also wrote about this in the Globe yesterday.)

With several holes still to fill on the roster, Rosenthal claims the Sox have already committed about $170 million to this season's payroll. That leaves only [insert abacus joke here] $8 million to spend before running up against the threshold. Should the team cross that $178 million barrier, they would be subject to a 40% tax on each additional dollar spent. For example, if tomorrow the Red Sox signed Edwin Jackson to a four year, $48 million contract, the true cost of Jackson's salary to the Red Sox this season would not be $12 million, but $13.6 million. That's a hefty penalty.

The tax kicks in because the team has exceeded the threshold the previous two seasons. If Boston remains under the $178 million spending limit this season, they'll effectively reset the clock, allowing them to go over the threshold next season without penalty. But, if they spend over the tax threshold this season, they'll not only be taxed as stated above, but they'll also be subject to a 50% penalty on dollars spent over the threshold next season.

If, as Rosenthal surmises, fear of the tax has effectively become a salary cap for the team, the need to acquire additional players could force the Red Sox to shed salary by moving players currently on the roster. There is already talk the Red Sox may look to move Marco Scutaro and, though it's been said the Sox aren't looking to move him, Rosenthal guesses that Kevin Youkilis might also be moved in such a scenario.

Before you accuse the Red Sox of being cheap, there are some important aspects to point out about all this.

Hearing this brings with it fear that the team will try to fill out important spots on the roster with non-tendered or similarly inexpensive players. (Tim Britton of the Providence Journal has some options along those lines here.)

First, it's important to note that none of this has happened yet. But, if the Red Sox did trade players like Scutaro ($6 million salary) and/or Youkilis ($12 million salary) to save money, it would not be in a vacuum. It would be because they were improving the roster. Included in "the roster" is the team's current stable of players as well as the organization's ability to acquire productive players in the future.

Remember, the Red Sox aren't going to spend $177 million on the team and then ruin that expenditure by not adding important pieces. They'll fill out the roster entirely and do so in what they believe is the best way possible. It would be a shame to see Youkilis go, less so Scutaro though he's a fine player, but they aren't going to deal those players unless the end result is to make the team better.

Also, we're not just talking about subtracting players. Dealing a Youkilis would presumably net something besides cap space. This isn't the NBA. The Sox would receive players in return. What's more, any deals would likely occur because the team is acquiring other players that put them over the $178 million threshold, either through free agency or directly.

There are also ways to decrease the team's payroll number without trading any players. Two examples come to mind. Negotiating a deal with David Oritz for a slightly lower AAV over two years would reduce his annual "cap hit." Marc talked about the second on last week's podcast. Because of his injury and subsequent Tommy John surgery, a clause in John Lackey's contract kicks in adding a sixth season at the major league minimum salary ($500K). This turns his five year, $82.5 million contract into a six year, $83 million deal. That lowers the average annual value from $16.5 million to $13.8 million. Of course, $33 million of that $83 million has already been spent so that could decrease the AAV on the remaining deal to $12.5 million. In any case, making that official in some capacity could give the Red Sox some additional spending room.

It's important to remember that, no matter what reports you read and no matter how many screamers on the radio call the team and its executives cheap. They are demonstratively not cheap, and anyone who claims so can be dismissed out of hand. The Red Sox are trying to win in 2012. They are also not going to be stupid and cut their own legs out from underneath themselves. These are smart people trying to win this year as well as to preserve their ability to add quality players and improve the franchise going forward. Remember that. No matter what you hear.

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