There's been a lot of speculation that the Yankees are the team to beat for Masahiro Tanaka. The interesting thing is, if the Yankees want to get Tanaka, they're going to have to pay much more in order to get him. Not just in 2014, but possibly for many years beyond. The reason? Tanaka would put them over the luxury tax and that means they'll face penalties in 2014 and beyond.
Yankees' 2014 Payroll
The Yankees are celebrating the possible suspension of Alex Rodriguez for the 2014 season. Why are they celebrating? Because If his year-long suspension is upheld, it will remove $27.5 million from the Yankees' payroll and would put them under the current luxury tax threshold. How much so is up for debate, but Joel Sherman tries to piece it together here, so we'll use his assumptions for the purpose of this article.
Removing ARod's piece of the puzzle from the Yankees' payroll puts them at $181.5 million for the 2014 season, $7.5 million under the luxury tax threshold of $189 million. A repeat luxury tax offender, the Yankees are on the hook for a 50 percent tax on any amount over $189 million. Let's conservatively give the Tanaka deal an average annual value of $20 million. If the Yankees signed him, that would put them at a total 2014 payroll (without any more additions) of $201.5 million. That means the Yankees would be at least $12.5 million over the tax, putting them on the hook for about a $6.25 million luxury tax bill. Tanaka's year one in New York would thus cost the club approximately $26.25 million in his first year.
But what gets interesting is the long term implications of staying over the luxury tax threshold in 2014. If the Yankees decide not to go over the threshold, their luxury tax rate re-sets to 17.5 percent. That means that in 2015, if they go over the threshold, they're only on the hook for a 17.5 percent tax, instead of a 50 percent tax if they go over in 2014.
Yankees' 2015 Payroll
So... what does the Yankees' payroll look like in 2015 and what's the potential impact of a 17.5 percent luxury tax instead of a 50 percent rate in 2015?
Let's look at this year's payroll and who is likely to be removed in order to get an idea of where they'd be in 2015:
Players whose contracts expire after 2014 (with relevant salary values)
Brett Gardner: $5 million
Alfonso Soriano: $4 million
Derek Jeter: $12 million
Hiroki Kuroda: $16 million
Kelly Johnson: $3 million
Ichiro Suzuki: $6.5 million
Vernon Wells: According to Joel Sherman, does not count towards tax in 2014
Total: $46.5 million
Players whose contracts will come onto the 2015 luxury tax calculations
Alex Rodriguez: $27.5 million
Arbitration eligible players that could get decent raises
Ivan Nova: second-year eligible
David Phelps: first-year eligible
David Robertson: second-year eligible
Shawn Kelley: third-year eligible
Wild (conservative) guess: $7 million
So, $201.5 million in current payroll - $46.5 million off the books + $27.5 million of ARod's deal + $7 million from arbitration eligible players= $189.5 million
Even if they want to simply replace the above seven players who are scheduled to depart with minimum salary minor leaguers, those players still get paid a league minimum of approximately $500,000, which adds another $3.5 million to the payroll. What all that means is the Yankees currently project to be over the tax threshold in 2015. With no real assets in the farm system, particularly ones that are ready for the majors, almost all of their additions in 2015 will have to come through free agency. And they'll have holes to fill at shortstop, left field, starting pitcher and second base if they want anything more than replacement-level production at those positions. The quality of those players are also going to have to be pretty darn good in order to put a playoff contender on the field, so the amount they could invest in those positions could be substantial.
Let's conservatively assume that the Yankees will invest an additional $20 million in the team in 2015 through free agency and minimum salary players, putting their payroll at about $209.5 million and $20.5 million over the cap. That means they'll pay 50 percent on the overage, leading to a 2015 tax of $10.25 million. Now, if the Yankees don't go over the 2014 threshold, they 1) wouldn't have a payroll as high and 2) would only have to pay a 17.5 precent luxury tax. For the sake of simplicity, let's assume the payroll in 2015 would be $209.5 million regardless of whether or not they sign Tanaka. The Yankees would only pay 17.5 percent on the $20.5 million overage, leading to a luxury tax payment of only $3.59 million. That's a $6.6 million gap in tax payments because of a 50 percent rate instead of a 17.5 percent rate. That means that the price you can put on the Tanaka signing in 2014 will have been $26.25 million and the price of Tanaka in 2015 is $26.66 million.
Yankees' 2016 Payroll... (shield your eyes)
And if you really wanted to get crazy, 2016 looks even scarier. The Yankees have no major contracts coming off the books after 2015. That's right. Jacoby Ellsbury, CC Sabathia, Mark Teixeira, Carlos Beltran, Brian McCann and Alex Rodriguez are all under contract. Talk about the potential for massive dead weight on a payroll that will no doubt exceed the luxury tax threshold again... assuming the Yankees don't pack it in for a couple of years. The impact of going over the luxury tax threshold in 2014 has on future luxury tax payments diminishes over time, but it still could be a hefty sum in 2016.
Yada Yada Yada, Cut to the Chase
I get that the Yankees are the favorites to sign Tanaka because they burn $20 bills in the fireplace just for fun. I just question how much is Masahiro Tanaka really worth to them. Is he worth the Yankees essentially paying at least a 25 percent surcharge over what his base salary will be? Are the Yankees willing to look themselves in the mirror and realize they have an opportunity to save millions in the next couple of years on teams that are going to become increasingly uncompetitive? Is it more prudent to trade Brett Gardner for prospects and sign a guy like Ubaldo Jimenez that keeps them under the tax threshold? Hal Steinbrenner is no doubt weighing these questions, but don't be surprised if Tanaka's price gets so expensive that it becomes too rich for the Yankees.
Now, I made loads of assumptions and I'm sure I missed something with all those numbers, so feel free to beat me up in the comments.