Stark: Doing the math on the ‘competitive balance tax,’ and the Red Sox’ motivation to trade Mookie Betts

soxhop411

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The athletic with another “inside baseball” type article that explains the reasoning behind the Sox trading Betts:
I never wanted to be Alan Greenspan when I grew up. I never wanted to work for H & R Block. I never even wanted to fill out my own tax return myself.

I enjoy writing more than write-offs. And I’m pretty sure most of you relate to that, unless you’re an actuary or something.

But there’s one tax in the world I do know a few things about. Believe it or not, I know enough about baseball’s Competitive Balance Tax, more often called the luxury tax, to understand exactly why the Red Sox were convinced it was worth their while to trade Mookie Betts and David Price. I can sum it up this way for you:

$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

I’ve done that math. I even ran it past people in baseball who work with this tax every day. And I can tell you that trading those two guys, and dipping under the tax threshold, could easily be worth hundreds of millions in savings off future tax bills. But…
These are the tax rates:

First threshold: $208 million
Tax rate: 20-50%

Second threshold: $228 million
Tax rate: 62%

Third threshold: $248 million
Tax rate: 92.5-95%

So how exactly does this affect the Red Sox? Read on.
Say the Red Sox had decided to keep both Betts and Price. According to FanGraphs’ Roster Resource, they were headed for an estimated payroll of about $235 million, for Competitive Balance Tax purposes. That was down slightly from the $242-million payroll they finished last season with, but still the highest payroll in baseball.

So they were going to be over the first two thresholds without this trade. And even a modest acquisition would have elevated them over all three thresholds. Hello, 95-percent land!

But now let’s go all sci-fi and venture into an alternative universe. Let’s say the Red Sox were not just hanging onto Betts and Price, but still going all in, in a Dave Dombrowski kind of way. Let’s say they’d gone out this winter and signed Zack Wheeler for the same deal he signed with the Phillies – five years, $118 million.
When you add in all the taxes the Red Sox would be subject to, that $118-million deal turns into nearly a $185 million deal – because just the taxes add another $67 million! So what’s the actual cost of Zack Wheeler in our alternative universe? Let’s use this fun comparison:

AAV* of Zack Wheeler: $37 million per year
AAV of Gerrit Cole’s Yankees contract: $36 million per year
(*tax-adjusted AAV)

That’s a little misleading because the Cole deal will force the Yankees to pay a tax bill, too. But you get the idea. In our alternative universe, the Red Sox wouldn’t be paying Wheeler third-starter money. They’d be paying him Cy Young Waiting to Happen money. So file that away
Much much more at the link
I am not going to spoil more of the article as it is really worth your time to read it all. There are couple Mookie contract scenarios in the article as well.

but it really shows both why the Sox were inactive on the FA market this year and of course why they needed to trade Mookie
 

Carmine Hose

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It does get annoying the constant retain that paying Mookie would force a CBT penalty and "if you pay him X, you're really paying X+Y." Why is his salary the one causing a penalty and none of the other awful contracts scrutinized? His salary may get them over the limit, but there are plenty others that got them up to the limit.
 

DennyDoyle'sBoil

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I have a question that I don't know where else to post but I've wondered about it for a while. Why doesn't Castillo count toward the CBT this year?
 

deanx0

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It does get annoying the constant retain that paying Mookie would force a CBT penalty and "if you pay him X, you're really paying X+Y." Why is his salary the one causing a penalty and none of the other awful contracts scrutinized? His salary may get them over the limit, but there are plenty others that got them up to the limit.
While this is fair, those other awful contracts are the sunk costs and cannot be undone, so his is the straw that breaks the camel's back and costs the +Y
 

shaggydog2000

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I have a question that I don't know where else to post but I've wondered about it for a while. Why doesn't Castillo count toward the CBT this year?
Because they outrighted him off of the roster and no longer have to count him against the CBT. That is no longer possible, so the Sox don't have that path to get rid of cap hits any more.
 

chawson

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It does get annoying the constant retain that paying Mookie would force a CBT penalty and "if you pay him X, you're really paying X+Y." Why is his salary the one causing a penalty and none of the other awful contracts scrutinized? His salary may get them over the limit, but there are plenty others that got them up to the limit.
To me it really does come down to Hanley and Sandoval. Those contracts were mistakes, but we could have weathered them pretty easily if not for the harsh taxes in the CBA the following year.

Cherington had set up a young and cheap core that would all start getting expensive together once Hanley and Pablo were off the books. But needing to replace their production meant the team had to allocate resources elsewhere.
 

soxhop411

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Of course the casual fan will still call an owner who does this cheap since
A: “it’s not my money”
And
B “they are rich, they can afford to spend like a drunken sailor”
But really, this issue arose only with the most recent CBA. the Yankees of the past CBA were able to constantly spend like drunken sailors because the punishments for going way over the lux tax were little to none. Now, not only do teams suffer financial penalties, but draft (domestic/international) to boot. It is in essence a salary cap, without officially calling it one.
 

gingerbreadmann

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Stark weaves together a bunch of hypotheticals that make the article hard to follow, so forgive me if I have misinterpreted anything he is saying.

Most of this article inexplicably works around the assumption that we not only keep Betts, Price, and everyone else, but actually signed Zack Wheeler this offseason as part of "going all in, in a Dave Dombrowski kind of way." I'm not sure why this would have happened in any universe given that Rick Porcello was right there at 1/$10, but alas the rest of the article is colored by these constraints (and by the assumption that if we signed Betts, we'd be in the 95% tax bracket for the entire duration of the contract). Stark goes on and on about the wonderful benefits of resetting the tax rate before unearthing this buried lede:

But what if they were to, say, find a way to trade Chris Sale or J.D. Martinez in the next year and then sign Mookie to that $400-million Powerball ticket? Now they might be under the threshold again, even with his salary. And if Chaim Bloom then does what he was hired to do and works his creative magic, allowing them to stay under the threshold permanently, they could save all $314 million of the potential tax bill on the Betts contract alone.
Mind you, I'm pretty sure this bit came in the middle of a hypothetical where Mookie and Price are gone this year. (But Zack Wheeler isn't? I can't tell.) Point being, Stark acknowledges that Bloom is perfectly capable of doing his job and finding a way to get under the threshold completely next year even with a fresh $40 million Betts contract on the books. And yet:

“I know people are taking shots at them for being cheap,” said an executive of one contender. “This has nothing to do with being cheap. You look at their payroll and where it was leading, and you can’t operate like that. So they had to find a way to get under that threshold. And the only way to get under is: Trade Mookie Betts.”
Putting aside the vested interest other teams have in not being called out as cheap when they choose not to pay their players, which I don't think can be fully put aside, this quote is incompatible with the prior conclusion that being stuck in the penalty forever -- aka "where it was leading" -- is anything but a foregone conclusion. On the contrary, no one is forcing us to sign Zack Wheeler and rocket into the highest tax bracket, and even with Price and Betts we were only $7 million above the lowest tax bracket. The option was always there to stand pat, sit on $10-20 million in tax payments this year, and figure out a long-term plan without surrendering the centerpiece any rebuilding effort would kill to build around, even if you accept that ownership "saw a team that wasn’t going to be better than the Yankees this year and knew it." Even if that team has most of the 2018 WS Champions on it with Devers and Bogaerts much improved.

Stark answered his own question: Owner $$$ rules the day, and nothing else. It's disingenuous to suggest that Henry et al were forced to either trade Betts (and Price) or lose literally hundreds of millions of dollars. The cost was extremely modest to play this year out with a competitive team and get creative with the contracts of players not named Mookie Betts.
 

Ale Xander

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The difference is the Yankees "rebuilt" smarter because they had Aaron Judge making the minimum and others too. We don;t have such a player in 2020 other than Devers, who is not a rookie. (combination of that good and that cheap)
 

OCD SS

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No, we had a similar cheap/ good core in Betts, JBJ, Beni, X, & ERod, to go along with Devers; we just had it a bit earlier than they did. The Yankees are looking at a similar bill coming due a few years down the line. It looks like Cashman built a better farm (and didn’t get hit with an extra commissioner’s sanction in the IFA market), so that should mitigate things in their end a bit …
 

DeadlySplitter

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I know it hurts right now, but our core (which came into its own mid-2015) produced 3 excellent seasons, 3 division championships, 1 WS title. the [outside the organization] starting pitching blew up any chance last year, but you take 75% playoff appearance rate every damn time. there is still this season with most of that core with an outside shot to compete again - and you'd still take 60% playoff appearance rate.

the new CBA / some of the dumb contracts this team hasn't been able to avoid on the books yearly since Hanley/Panda / Pedey's injuries kept this core from extending together, but they have every chance to retool and get a modified / new core by 2022. having international FA money (something this article doesn't even go into, but it is dependent upon the luxury tax) will help a lot, if Bloom doesn't fall for the next Rusney Castillo.
 

Drek717

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Stark answered his own question: Owner $$$ rules the day, and nothing else. It's disingenuous to suggest that Henry et al were forced to either trade Betts (and Price) or lose literally hundreds of millions of dollars. The cost was extremely modest to play this year out with a competitive team and get creative with the contracts of players not named Mookie Betts.
Prior to the new CBA and tax penalties Henry routinely paid luxury tax money. This drive to meet the LT threshold only arose now that the team A. was basically not a playoff contender last year and B. would be sacrificing draft pick position to maintain the status quo, picks and international signing money to add to a team that wasn't a playoff contender in 2019.

What is disingenous is acting like John Henry and the rest of the ownership group haven't always put winning first in how they manage the Sox specifically. The owners as a group, including Henry, established a luxury tax system that effectively forces teams to comply, which inherently ensures that Henry and co. make giant stacks of cash, but this was a league-wide result, not Henry himself pulling back spending. This is because Henry and co. are clearly smart enough to know that a winning Sox team makes more money than a mediocre Sox team.

The only difference now is that they weren't a good enough team last year to justify the long term competitive costs to stay above the threshold to maintain this club. He hired Dombrowski and encouraged him to spend for a few years, prioritizing short term winning. They won a title in '18. When the team massively regressed in '19 and the bill came due a change was needed to clear the books.

The difference is the Yankees "rebuilt" smarter because they had Aaron Judge making the minimum and others too. We don;t have such a player in 2020 other than Devers, who is not a rookie. (combination of that good and that cheap)
The differences were that:
1. the Yankees were on the verge of needing a rebuild when the new tax rules came in place, so they hit the reset button sooner.
2. the Red Sox shipped large chunks of their next wave of farm talent out the door with Dombrowski at the helm to win short term. Give up the '18 WS but return Moncada, Kopech, Logan Allen, Manuel Margot, etc. and the club would have all the back end of the rotation/bullpen/bench depth they could ever need with a handful of top end prospects/newly arrived starters.
3. The Red Sox compounded this with a combination of bad luck and rule breaking. The passing of Daniel Flores at 17, after committing most of their bonus money to him, and the bundled bonus penalty stretching the post-Moncada signing limitations out an entire extra year combined to basically wipe out what should be the current A/A+ class of international FAs.

Take away #3 and there would probably be at least some extra reason for optimism in the low minors. Take away #2 and we give up a WS but would be more loaded with young talent than the Yankees right now. I'd guess most will keep the WS.

So the Sox are hitting the reset button to some degree this year, getting back one ML ready piece and two guys who profile as at least ML level players, Downs as a potential every day player, specifically where their positional depth is weakest. The question now is if these players, the handful of worthwhile prospects in the farm today, and the other fringe moves Bloom will make over the next ~12 months pan out to see the team return to a highly competitive level as soon as 2021, or will this be a longer rebuild than most Sox fans are willing to tolerate given the success we've enjoyed to date since the start of the new millenium.
 

Bongorific

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This is the new normal for high payroll teams. They can compete for several years but will eventually need to reset the tax. The Yankees just did it. It’s the Sox turn now. And the cycle will go on.

But I miss Mookie.
 

santadevil

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Putting aside the vested interest other teams have in not being called out as cheap when they choose not to pay their players, which I don't think can be fully put aside, this quote is incompatible with the prior conclusion that being stuck in the penalty forever -- aka "where it was leading" -- is anything but a foregone conclusion. On the contrary, no one is forcing us to sign Zack Wheeler and rocket into the highest tax bracket, and even with Price and Betts we were only $7 million above the lowest tax bracket. The option was always there to stand pat, sit on $10-20 million in tax payments this year, and figure out a long-term plan without surrendering the centerpiece any rebuilding effort would kill to build around, even if you accept that ownership "saw a team that wasn’t going to be better than the Yankees this year and knew it." Even if that team has most of the 2018 WS Champions on it with Devers and Bogaerts much improved.

Stark answered his own question: Owner $$$ rules the day, and nothing else. It's disingenuous to suggest that Henry et al were forced to either trade Betts (and Price) or lose literally hundreds of millions of dollars. The cost was extremely modest to play this year out with a competitive team and get creative with the contracts of players not named Mookie Betts.
These aren't really hypothetical's, he is showing what would happen if you try and just spend, spend, spend year after year

They may not have been "forced" to trade Mookie, but there wasn't really any other pieces to move to get them under the $208
At least this way, they re-stock the farm a bit, reset the tax level and start being competitive sooner

The Mookie trade is the "tax" the Sox had to pay for giving out some shitty contracts, basically starting with the Pablo/Hanley signings in 2015
 

Van Everyman

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The only difference now is that they weren't a good enough team last year to justify the long term competitive costs to stay above the threshold to maintain this club. He hired Dombrowski and encouraged him to spend for a few years, prioritizing short term winning. They won a title in '18. When the team massively regressed in '19 and the bill came due a change was needed to clear the books.
This really isn't said enough. For one, they did exactly what people wanted and kept the band together in '19 -- and totally fell on their faces. How different would we all feel if the team had either won another WS or made another deep postseason run? Context matters here -- the team made the choice to extend its championship window this last year by keeping the whole '18 team. It didn't work out.
 

Le Bastonois

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This really isn't said enough. For one, they did exactly what people wanted and kept the band together in '19 -- and totally fell on their faces. How different would we all feel if the team had either won another WS or made another deep postseason run? Context matters here -- the team made the choice to extend its championship window this last year by keeping the whole '18 team. It didn't work out.
Regression toward the mean, huh? 2018 was a blast and we pummeled the Yankees. Mookie was a mortgage payment.

It hurts to set you free
But you'll never follow me
The end of laughter and soft lies
The end of nights we tried to die.
This is end.
 
Last edited:
Jul 21, 2005
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No, we had a similar cheap/ good core in Betts, JBJ, Beni, X, & ERod, to go along with Devers; we just had it a bit earlier than they did. The Yankees are looking at a similar bill coming due a few years down the line. It looks like Cashman built a better farm (and didn’t get hit with an extra commissioner’s sanction in the IFA market), so that should mitigate things in their end a bit …
It will be interesting to see what direction the Yankees take in the next couple of years. Last year they finished the year with a luxury tax number of 231 milion. So they were over the first two thresholds. Right now, according to Sportrac, their luxury tax number is 257 million. So unless something dramatic happens, they will be over again. Next year they've got 120 million in committed salaries, but that's without including any arbitration amounts (Judge, Sanchez, Torres, Andujar...) and would include only two members of the current rotation, Cole and Severino. Maybe they could stay under the highest levels of the tax by incorporating more of their farm system into the rotation, but I don't see any way that they could avoid going over for a third straight year without making a move similar to Betts/Price.
 

jon abbey

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It will be interesting to see what direction the Yankees take in the next couple of years. Last year they finished the year with a luxury tax number of 231 milion. So they were over the first two thresholds. Right now, according to Sportrac, their luxury tax number is 257 million.
That 257 includes Ellsbury's salary which is currently being contested and also Happ's, which they may move midseason once Paxton and German are back.

Also the current CBA only goes through 2021, it seems likely there will be big changes in the next one.
 

catsooey

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This really isn't said enough. For one, they did exactly what people wanted and kept the band together in '19 -- and totally fell on their faces. How different would we all feel if the team had either won another WS or made another deep postseason run? Context matters here -- the team made the choice to extend its championship window this last year by keeping the whole '18 team. It didn't work out.
The only thing is that they could have brought the whole team back without signing Chris Sale a year early and without giving out another Hanley/Panda-style contract to Eovaldi. These contracts that they’ve buried themselves with are incomprehensible. Grotesquely overpaying a guy no one else wants, someone who ‘doesn’t want to bend down‘ to catch the ball (Hanley). Overpaying a guy who has been let go by his former team because he’s eating himself out of baseball and won’t accept a weight clause in his contract - and not insisting on a weight clause as well (Hanley). Paying a total of over 150 million for a Cuban player you’re not even sure can make it in the big leagues (Rusney). Chasing your home grown ace (John Lester) out of town when you could have gotten him at 120 and 6 - after making an insulting offer of half his market value. I don’t blame them for making well thought out moves that don’t work out, but so many of these signings (or non signings) were like a car accident in slow motion. That’s to say nothing of leaving the DH spot empty for a year after Papi left or going into last year without a closer. I think this team could have won a few championships, or come very close, had things been run a little more professionally.
 

JimD

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The only thing is that they could have brought the whole team back without signing Chris Sale a year early and without giving out another Hanley/Panda-style contract to Eovaldi. These contracts that they’ve buried themselves with are incomprehensible. Grotesquely overpaying a guy no one else wants, someone who ‘doesn’t want to bend down‘ to catch the ball (Hanley). Overpaying a guy who has been let go by his former team because he’s eating himself out of baseball and won’t accept a weight clause in his contract - and not insisting on a weight clause as well (Hanley). Paying a total of over 150 million for a Cuban player you’re not even sure can make it in the big leagues (Rusney). Chasing your home grown ace (John Lester) out of town when you could have gotten him at 120 and 6 - after making an insulting offer of half his market value. I don’t blame them for making well thought out moves that don’t work out, but so many of these signings (or non signings) were like a car accident in slow motion. That’s to say nothing of leaving the DH spot empty for a year after Papi left or going into last year without a closer. I think this team could have won a few championships, or come very close, had things been run a little more professionally.
Sure, maybe some different moves over the last decade net another title or two. Or maybe that alternate Red Sox team wins only one title in the 2010's. Or zero titles.
 

OCD SS

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Also the current CBA only goes through 2021, it seems likely there will be big changes in the next one.
Maybe, but I thought the same thing in the last round of negotiations and the union really dropped the ball.

I think most owners are quite happy to have a check on big spending teams that depresses player salaries. I think the real question is if the players see that teams are treating the CBT as a hard cap and are willing to fight to undo those limitations even though the point of the fines is to increase competitive balance across the league (and that it seems to be working).