December 5, 2005

Ghosts of 2002

Contraction, Luxury Tax Back on the Table as New CBA Dawns

by Neil deMause

Funny things happen when people sit around a negotiating table. One minute you're dotting i's and crossing t's to put a halt to years of bickering and open warfare; the next, you've just agreed to swap Manhattan for a pile of nutmeg.

Something like that must have gone on in the waning days of baseball's labor talks in 2002, because the resulting collective bargaining agreement is filled with odd clauses that could only have been concocted at 4 a.m. after the coffee had run out. One of these is already having an impact in the world of stadium-building, where the deductibility of construction costs from revenue-sharing--aka "the Steinbrenner dodge"--has given teams like the Yankees a loophole by which to build new stadiums and force their competitors to help pay for them.

Then there are the clauses that lurk like time bombs, lying forgotten until years after the fact. As Chris Isidore and Jayson Stark have pointed out in recent weeks, the luxury-tax system agreed to four years ago contains an odd wrinkle in its implementation schedule:

                           TAX RATE FOR EXCEEDING THRESHOLD
                1st time    2nd time    3rd time    4th time
2003              17.5%
2004              22.5%        30%
2005              22.5%        30%         40%
2006                 0%        40%         40%         40%

That's right: First-time offenders in 2006 are exempt from paying any luxury tax at all, even if they sign Johnny Damon, A.J. Burnett, and John Flaherty for $20 million apiece, or something equally silly. And "first-time" here refers to consecutive offenses, meaning that only teams that broke the $128 million payroll threshold last year--that would be the Yankees and Red Sox--have to worry about paying tax this year.

The luxury tax has hardly been the catastrophe for players that some had feared, largely because Don Fehr managed to set the bar high enough ($117 million in 2003, scaling up to $136.5 million in 2006) that very few teams have had to worry about it--the only clear casualty so far has been the Yanks' failure to pursue Carlos Beltran last winter. Still, when you're talking about two teams paying a 40% premium that the rest of the league doesn't have to worry about, that's an economic incentive that should make even pennant-starved baseball owners sit up and take notice. You think George Steinbrenner didn't notice that if he'd offered Brian Giles the same $10 million a year the Padres did, it would have ended up costing him $14 million next year once his tax tab is figured in? (Add in the Beltran non-signing, in fact, and you could make an argument that the biggest beneficiary of the luxury tax might end up being Bubba Crosby.)

Likewise, being absolved from the tax effectively gives other teams a 19% discount on their off-season purchases over this year's $136.5 million payroll cap. So far, though, no one seems to have taken the bait. Of the three teams Isidore identified as likely cap-busters this winter, neither the Angels nor the Cards have been aggressively taking on salaries (unless you count taking on Hector Carrasco as "aggressive"); the Mets may have added Carlos Delgado and Billy Wagner, but they'll still be hard-pressed to bust the limit thanks to the dispatch of Mike Cameron to San Diego, especially if Omar Minaya succeeds in dumping Kris Benson's contract for a bag of beans. Meanwhile, the tax-ridden Red Sox continue to pile up payroll like it's going out of style. Clearly there's no accounting for accounting when it comes to GM hot stove logic, or lack thereof.

Next year, though, things could get even more interesting. Stark writes that if the owners and players agree to play an additional season under the current CBA rather than conduct a knock-down drag-out before the end of 2006, "they would be extending another tax-free year along with it (a potentially monstrous advantage for the Red Sox in 2007 if they pay no tax in 2006)." But in fact, as the late Doug Pappas reported back in 2002, the luxury tax officially expires on the last day of the 2006 season, so if the two sides decide to keep playing in 2007 without a new contract, the luxury tax disappears entirely. If nothing else, that--coupled with the possibility that the revenue-sharing structure could be overhauled yet again in the next labor agreement--could loosen the Yankees' pocketbooks again next winter. Don't sign a long-term lease, Bubba.

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