For the first time in 15 years, the Yankees’ payroll was under the luxury tax limit last year. In fact, the Yankees are the only team in baseball that paid the luxury tax every year, until finally getting under last season.
Hal Steinbrenner has talked for years about how you don’t need to spend upwards of $200 million to field a contender. Before last year, in an interview with David Lennon of Newsday, Hal said, “logic dictates that you don’t have to [spend $200 million to have a championship-caliber team.”
Specifically speaking about the luxury tax, Brian Cashman told the New York media that his goal is “to not line the pockets of opponents to use that [revenue] against us.”
With comments like those, Yankee fans are rightfully worried that last year’s austerity was a sign of things to come. The Yankees cut payroll by over $34 million between 2017 and 2018. The company line was that they were cutting payroll to reset the luxury tax penalties, and that this rest would allow the Yankees to again spend above the limit.
However, those comments from Steinbrenner and Cashman indicate that austerity may be the plan moving forward. And, actions this offseason such as not even extending a formal offer to Patrick Corbin speak louder than any words.
The current buzz in Yankee-ville is about Manny Machado. He visited the Yankees a few weeks ago, and there are multiple reports that he is enamored with the Yankees and the city of New York. Joel Sherman of the New York Post went as far as to say that Machado prefers the Yankees to his other suitors.
The question then remains: are the Yankees willing to have a $200 million payroll and go over the luxury tax for Machado? And if so, what impact will his contract have on the payroll?
The Current Payroll
According to Cot’s, the Yankees current payroll is at $207.2 million for this upcoming season. That number includes the estimates for arbitration eligible players as well as Sonny Gray’s contract. If the Yankees trade Gray and his projected $9 million salary before opening day, they will be $8 million below the $206 million threshold. If not, they will already be over by about $1 million. The Yankees still intend to trade Sonny Gray, so for these purposes we will assume that the current Yankee payroll is $198 million.
So let’s take a look at how signing Machado to various AAV salaries will affect the payroll, and the luxury tax.
The luxury tax payout works as follows: the first $20 million is taxed at 20 percent because the Yankees rest their luxury tax limit. The next $20 million has a 12 percent surfeit tax, which is why you see the jump in payout if they sign him to a contract with an AAV of $30 million or more.
The Athletic’s Jim Bowden (subs req’d) projected Machado for a $31 million AAV earlier this offseason, to give you an idea for where the contract might go. The higher AAVs at the end are in case the Yankees prefer to go with a higher salary for fewer years.
According to the CBA, the first $13 million in luxury tax payouts collected across the league go to fund player benefits. 50 percent of the remaining amount goes for player compensation, and then what is left goes to other teams. For the 15 years in which the Yankees paid the luxury tax, they paid an average of $22.7 million per year. Even in the most extreme example here, they would only pay $7.5 million next year, which is less than CC Sabathia’s contract.
We noted that at most 50 percent of luxury tax payout goes to other teams, so by signing Machado, the Yankees would send $3.75 million to be divvied up by the other clubs. That works out to about $130,000 per team, which is barely enough to cover a team’s September call-ups.
So yes, Brian Cashman, the Yankees are sick of lining other club’s pockets so that they can call-up the Kyle Higashioka’s and Tyler Wade’s of the world. The notion that the Yankees don’t want to go over the luxury tax because it helps other teams is specious at best and utterly ridiculous at worst. Not wanting to pay any luxury tax is just owners preferring to increase their bottom line instead of spending more on the on-field product.
The Revenue Elephant in the Room
I don’t want to delve too deep into this issue because it’s a longer post for a different day, but the Yankees can absolutely afford to sign players like Machado (and Bryce Harper!) without adversely affecting the bottom line. The reasons for that: increased revenue and team value.
You probably saw the graph from Reddit going around which shows the Yankees’ payroll and revenue by year, and here it is again:
You can clearly see the trend that as revenue has gone up, payroll has gone down over the past few years.
With the current trend, the Yankees likely spent less than 30 percent of their revenue last season on the team payroll. That is a far cry from just a decade ago when they spent 50 percent of revenue and won the World Series. If the Yankees spent at that level, which they have shown they can and still increase team value and turn a profit, the payroll would be over $300 million.
I am not advocating for insane spending, but I would be remiss if I did not point out that the Yankees’ last AL East title was in 2012, and since that year you can see trend of spending a lower proportion of revenue on payroll. That 30 percent rate is lower than even the Tampa Bay Rays, who just closed off sections of their stadium because nobody is even attending their games. That’s the relative level of spending the Yankees are at and trying to justify to their fans.
One final note on revenue – it’s not just the Yankees with higher revenues.
League wide revenues continue to rise. According to Forbes, MLB had record revenues of $10.3 billion last season. That record comes as salaries went down by $115 million across the league. Ben Weinrib of Yahoo Sports and Craig Calcaterra of HardBall Talk had in-depth pieces on this concerning trend.
My colleagues Nick and Conrad recently wrote about why arguments against signing top free agents are not convincing. Long story short, teams are not strapped for cash, and you should not accept arguments from owners about needing to cut payroll and spend less on players.
Signing Manny Machado will cause the Yankees to exceed the luxury tax threshold once again. Based on my math, their luxury tax bill will be at most 1/3 of what it was during the past 15 years, and signing him will not even remotely approach spending commensurate with revenue.