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Breaking Down MLB's Luxury Tax: 2003-2007 PDF Print E-mail
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Written by Maury Brown   
Tuesday, 25 December 2007 13:27

NY YankeesThe New York Yankees continued their streak as baseball’s highest total payroll team, as well as going above MLB’s competitive-balance tax, or as it is more commonly referred to as, the Luxury Tax. The Yankees did, however, lower the amount they will have to pay for the second straight year. As reported by Ronald Blum of The AP:

The Yankees were hit with a tax bill of $23.88 million by Major League Baseball in a notice sent to teams late Friday, pushing them over the $100 million mark since the penalty for profligate spending was introduced in 2003.

The only other club that must pay the competitive-balance tax, as it is formally known, is the World Series champion Boston Red Sox, who owe $6.06 million.

Checks are due at the commissioner's office by Jan. 31.

The Yankee’s paid just over $26 million last season. (see chart below). They have paid over $121.6 million in total Luxury Tax payments. The Red Sox have now paid into the system every year since 2004, but at a mere fraction of what the Yankees have paid at just under $13.86 million. The Angels paid $927,059 in Luxury Tax in 2004.

In total, $136,418,382 in Luxury Tax bills have been paid by the three clubs. The Yankees have paid 89% of the total since the system was implemented in 2003. 

As for how the Luxury Tax is calculated, teams that exceed a defined total team payroll threshold are dinged with the tax. The threshold for the 2006 season was $136.5 million in the last year of the 2002-2006 CBA, and jumped to $148 million in 2007 (the first year of the current CBA), $155 million in 2008, $162 million in 2009, $170 million in 2010 and $178 million in 2011, or increases of approximately 5 percent a year. Clubs that exceed those total team payroll figures would be hit with the tax. The jump in threshold values from 2006 to 2007 represents an $11.5 million jump from the old agreement to new.

On the rates for the tax, they start at 22½% for clubs over the threshold the first time, 30% for clubs over the threshold the second time, 40% for clubs over the threshold the third time, and repeated at the 40% rate for the remainder of the agreement. Based upon this, the Yankees and Red Sox were hit with a 40% rate for breaking the threshold in 2007, as they were the only two clubs to have broken the threshold in 2006.

Below is a break down of all monies paid by way of the Luxury Tax. Note that the Yankees, Red Sox and Angels are the only teams to have ever broken the thresholds, and paid Luxury Tax.

Luxury Tax Figures: 2003-2007
Club
2003
2004
2005
2006
2007
Total
Yanks $11,798,357 $25,964,060 $33,978,702 $26,009,039 $23,881,386 $121,631,544
R. Sox   $3,148,962 $4,148,981 $497,549 $6,064,287 $13,859,779
Angels   $927,059       $927,059
Total $11,798,357 $30,040,081 $38,127,683 $26,506,587 $29,945,673 $136,418,382


Maury Brown

Maury Brown is the founder and president of the Business of Sports Network, which includes The Biz of Baseball, The Biz of Football and The Biz of Basketball (The Biz of Hockey will be launching shortly). He is also an author for Baseball Prospectus, Basketball Prospectus and is an available writer for other media outlets.

Brown's full bio is here. He looks forward to your comments via email and can be contacted through the Business of Sports Network.

 
 
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