Wednesday, December 16, 2009

Fiesty Small Market Underdogs Near Luxury Tax Threshold

Good morning, Fackers. Any guesses as to the identity of the team in the headline? From WEEI:
The signings of John Lackey to a five-year deal in the $82.5 million range and Mike Cameron to a two-year, $15.5 million contract would push the Sox payroll — as calculated for Major League Baseball’s luxury tax purposes — to an all-time franchise high.

Based on salary projections for the players who were offered contracts last Saturday, the Sox are already nearing the $170 million threshold for 2010 at which clubs will be assessed a luxury tax penalty.
It might have been the acquisitions of Lackey and Cameron that put the Sox very close to the Luxury Tax threshold, but as Matthew Pouliot from Circling the Bases points out, the deals given to their homegrown players are a big factor as well:
Prior to last year, the team was so conscious of its position straddling the luxury tax that it avoided signing young players to long-term deals. That changed as Dustin Pedroia, Kevin Youkilis and Jon Lester all received extensions that kept them into their free agent years.

And it's those contracts that could put the Red Sox over the top. In reality, those three players, all of whom signed extensions last winter, will earn $16.375 million next season. However, for tax purposes, they're valued at $23.03 million.
The WEEI article provides a player by player estimate of the Sox salaries as they pertain to the Luxury Tax and a breakdown of some of the nuances involved in how the league calculates payroll for it. As far as the MLB is concerned, deals which buy out some arbitration years like the ones singed by Kevin Youkilis, Dustin Pedrioa and Jon Lester are all taxed at the average annual value of the deal meaning that, although Lester is making $3.75M this year, the Sox pay tax on the AAV of his 5 year, $30M deal.

The Luxury Tax is structured like the taxes we pay to the government, so it only applies to the amount spent over $170M, meaning the amount of money to the Sox will be next to nothing if they do exceed that mark. But the larger point here is that despite the much bemoaned free agent acquisitions the Yankees made last off season, when the dust settles, the two teams are likely to be fairly close (~$30M, 15%) in terms of payroll this year.

To many of the deluded members of Red Sox Nation like the ones who reared their ugly heads here, the Sox are David to the Yankees' Goliath, when in reality, the Sox are playing the role of Goliath to the rest of the league with the exceptions of the Mets and Cubs. Why do Sawx fans cling to the belief that their team is one of the "have nots"?

Part of this is the fact that Boston itself actually is a small market. The city itself has a population of about 600,000 and even expanding to the Greater Boston Area encompasses fewer than 5 million people. However, the Red Sox have a monopoly on the territory that stretches from Maine through New Hampshire, most of Massachusetts, Rhode Island and about half of Connecticut. There isn't one truly large city in that region, but there are a whole lot of small towns. Add them all up and you are pretty close to 10 million people.

Another factor is that deal just given to John Lackey will actually be the second largest in terms of total dollars that the Red Sox have on their books (behind only Matsuzka's if you include the posting fee). A.J. Burnett was given the same exact deal from the Yankees, but it's only the 5th largest the team has on the books, trailing A-Rod, Jeter, Teixeira and Sabathia. This is a positive for the Sox in that they have more future flexibility without those long term commitments, but it also means that they continually have to either develop players from their system or find new free agents to fill their needs.

Do the Sox do this because they can't afford those longer deals or because they typically choose not to employ that strategy? Since they committed over $100M to Matsuzaka and went down to the wire with the Yanks on Teixeira, I would guess it is the latter.

There is a chance that the Sox will have a significantly lower payroll than the Yankees 3, 4 or 5 years from now, but there is also a chance that their prospects don't pan out and they are forced to overpay for stop gaps like Marco Scutaro, John Smotlz and Brad Penny as opposed to having elite but aging players already under contract.

Such is the trade off between living by the seat of your pants and making long term investments in blue chip players. However, at the present moment, the difference between those two strategies in terms of dollars spent isn't especially significant.


  1. I am a Sox fan who doesn't begrudge the Yankees spending. They try to spend and aren't always win some and you loose some.

    I think the sox employ a strategy that relys heavily on farm prooduction that has been successful for them. The stop gaps are just that and have been short term commitments. they have the $ to overpay on occasion. It's the price of doing business. They have also shown a willingness to spent $ on FA's...

    Let's not minimize the impact of $30mil. That's the difference between the Blue Jays and the Phillies

    You seem to have missed that they have the nucleus of this team, who are young players, under control till at least 2013. Ellsbury, Pedrioa, Youk, Bucholtz, Lester. They can have 2 more years of Pap and Bard is in the wings. That's all homegrown upper eschelon talent

  2. I meant to say the Sox try to spend and aren't always successful

  3. Fair point about the significance of $30M, Kevin. But at the same time, I don't hear too many Jays fans whining about how much the Phillies spend.

    The Sox do have a solid core of homegrown talent, as do the Yanks (Jeter, Pettitte, Posada, Cano, Rivera, Chamberlain, Hughes, Gardner/Cabrera). The difference is that most of those Yanks are older and therefore more expensive, making up a significant portion of the gap in payroll separating the two teams.

  4. Hence the philosophical difference between the two teams.

    ...btw Jay's fans have bigger fish to fry than how much the Phillies spent