The luxury tax and you: A primer
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The luxury tax and you: A primer
Matt Gelb, Inquirer Staff Writer
There is no edict that says the Phillies must remain under the mythical barrier of the Competitive Balance Tax, better known as the luxury tax. The team is not required to open its books to anyone, so we cannot be sure what sort of profit margins exist at 1 Citizens Bank Park Way. Needless to say, times have never been this good for the money machine. And, in turn, the Phillies' payroll has never been higher.
But $178 million remains the ceiling set publicly by Ruben Amaro Jr. "Luxury tax" has replaced "revenue sharing" as the buzz phrase in South Philadelphia, the surest sign of changing times. (In fact, under the new collective bargaining agreement, the Phillies are ineligible to ever receive any revenue sharing money should times be tough again.)
Amaro has often said this winter that his team is up against the tax threshold. That has been met with skepticism because in actual dollars, the Phillies will pay their current roster approximately $156 million in 2012.
But that's not how the payroll is calculated for luxury tax purposes.
Last season, the Phillies fell short of paying luxury tax by less than $1 million, according to a baseball source. Two payments totaling approximately $8 million from the Houston Astros to offset salaries for Roy Oswalt and Hunter Pence ensured the Phillies could stay under the $178 million mark.
The complication lies in two factors: Major League Baseball recognizes contracts by their annual average value (AAV) — not by the dollar amount the team is actually paying that player. So, for example, Cliff Lee earned $11 million in salary last season because the Phillies back loaded the contract. But under the guise of MLB, Lee accounted for $24 million in payroll because of the AAV of his five-year, $120 million deal.
In some instances, that can benefit the Phillies. Chase Utley made $15 million in 2011 and $15 million in 2012, but he counts for only $12.14 million against the luxury tax.
Ultimately, the two figures do not differ greatly.
| NAME | 2012 $$ | AAV $$ |
| Cliff Lee | $21.50 | $24 |
| Roy Halladay | $20 | $20 |
| Ryan Howard | $20 | $25 |
| Cole Hamels | $15 | $15 |
| Chase Utley | $15 | $12.14 |
| Jimmy Rollins | $11 | $11 |
| Jonathan Papelbon | $11 | $12.5 |
| Shane Victorino | $9.5 | $7.3 |
| Joe Blanton | $8.5 | $8 |
| Placido Polanco | $6.25 | $6 |
| Carlos Ruiz | $3.7 | $2.95 |
| Kyle Kendrick | $3.59 | $3.59 |
| Jose Contreras | $2.5 | $2.75 |
| Ty Wigginton | $2 | $2 |
| Jim Thome | $1.25 | $1.25 |
| Laynce Nix | $1.15 | $1.25 |
| Dontrelle Willis | $0.85 | $0.85 |
| Brian Schneider | $0.80 | $0.80 |
| Vance Worley* | $0.48 | $0.48 |
| Antonio Bastardo* | $0.48 | $0.48 |
| John Mayberry* | $0.48 | $0.48 |
| David Herndon* | $0.48 | $0.48 |
| Michael Martinez* | $0.48 | $0.48 |
| Mike Stutes* | $0.48 | $0.48 |
| Hunter Pence | ARB 3 | ARB 3 |
| TOTAL | $156.47 | $159.26 |
* = estimated salary at major-league minimum of $480,000
So for 2012, the AAV is $3 million more than actual payroll. But we're still well shy of the mythical $178.
That's where Hunter Pence, who remains unsigned, factors. Pence is in his third year of arbitration and his agent Rick Thurman (who just negotiated a mega-arbitration deal for Tim Lincecum) submitted a salary request of $11.8 million. The Phillies countered at $9 million, a difference of $2.8 million. (Pence made $6.9 million in 2011.)
The Phillies typically avoid arbitration hearings at all costs. They can be messy and detrimental. Since arbitration began in 1974, the Phillies have entered eight hearings. They have won seven and lost one, that one being the most recent in 2008 with Ryan Howard.
Thurman showed a willingness to go to a hearing last winter when he took Pence up against the Astros and won. That's not to say a hearing will happen again in 2012, but that $2.8 million could be quite important to the Phillies for luxury tax purposes.
Why? Well, every payroll (as recognized by MLB) must include monies for player benefits. That number, according to a source, typically amounts to $10 or $11 million per season. That's why the Phillies were so close to the limit last season, even with the Astros subsidizing a large chunk of salary.
So if Pence makes $9 million in 2012 and $10 million in benefits is added, the Phillies hit that mythical $178 million figure. If he's at $11.8 million, they could go over.
Again, we'll stress these are rough calculations and plenty of things can change between now and the end of the season, when MLB does its accounting. But this paints a clearer picture of how the Phillies actually toe the line between paying the tax and not.
Teams that surpass the threshold of $178 million in 2012 will be taxed 20 percent for every penny over. The ceiling remains $178 million in 2013, but the penalties increase for repeat offenders. So if the Phillies go over in 2012 and 2013, they would pay a 30 percent tax in 2013. If they go over only in 2013, it's a 17.5 percent tax.
The threshold then increases to $189 million in 2014. So, logically, it would make most sense for the Phillies to be amenable to paying the luxury tax in 2013 because with the higher ceiling in 2014, they could avoid it. Once a team skips a year in paying luxury tax, they receive amnesty and return to the original rate of 17.5 percent.
Either way, the Phillies are relegated to bottom-feeding on the current market, turning to such moves as signing outfielder Juan Pierre to a minor-league deal Friday. Pierre made $8.5 million in 2011 and always has a good rep because he puts the ball in play and can run. He'll have a shot at the final bench spot out of spring training.
The Wilson Valdez trade wasn't made solely for financial purposes, but it didn't hurt saving $500,000 on the utility infielder spot when they already had a quite similar player in Michael Martinez. The Phillies never planned on replacing Valdez with such names as Jeff Keppinger and Ryan Theriot, who both signed elsewhere in the last two days.
Neither side on the Pence negotiations was willing to comment this week beyond a standard "negotiations are continuing." It's unlikely the case moves to a hearing, but it bears watching because $2.8 million means a lot to the Phillies right now.
Have a question? Send it to Matt Gelb's Mailbag.
All the more reason to question the overpays to Paplebon and Howard.— willthethrill11- No one should question the "overpay" to your best run producer and best RBI man in the NL. It's easy to question the Papelbon contract now that Madson's signed for less money. The public will never know what happened during the Phils' negotiations with Madson, because neither side will ever admit to being partially at fault. Most certainly the agent. If there's a guy in the starting lineup that's overpayed, it's Utley. Best buy on the roster is Victorino.— beegal99
Comment removed.- Comment removed.
- I can see how and why they'd veer away from that 20% tax. In the end though, between ticket sellouts, concessions, TV revenues and a possible playoff berth and all the potential riches that ensue..I'm sure they can cover the tax ten-fold sans a bead of sweat.— gslide
- ...and what would you have done instead, will?? Don't just criticize, tell us what the correct plan of action should have been...and make sure you give Ruben a call and let him know the error of his ways...i'm sure he'd be glad to hear from a real baseball expert...— Buck Dharma
- Seems like moving Kendrick would be a great move. He could be another team's 5th starter at an affordable price and give us more wiggle room should an injury occur. With the veterans we signed to minor league deals like Pineiro this could be an option.— Blue and White
- Comment removed.
- Once you make the decision to sell off your farm system with a "win now" approach, including a catcher, 1st baseman, and CF all in the top 50 overall of MLB Prospects... You lose the right to complain about the luxury tax. If the owners werent operating at a very high profit level they would not be spending the $178 million to begin with.— FABER
- I care no more about mythical figures of 178 million dollar payrolls than as I care about mythical creatures such as unicorns. Bottom line is the Phillies are printing down at their ballpark and there is no salary cap in baseball. Do whatever it takes to secure a World Series title.— Iron Giant
- beegal - plenty of people can and should question the deal to Howard. If the Phillies had waited for him to hit free agency (same year as Pujols and Fielder) think they would have made out better than they did. Answer is certainly yes, because his last 2 years have been his worst, and he is now injured. If you don't want to follow the financial side of the sport and just enjoy watching the games, that's great, but then don't comment on this article. That contract is an albatross and it has 5 years to run.— Phils Phan 28
- While I agree that Fielder and Pujols are currently better than Howard, you also have to factor in that Howard will be off the books in 5 years weather he stinks or accels on the other hand Pujols and Fielder have 9 and 10 years respectively on their contact and will be an anchor on that ship for a long time if they cant produce a their current level. Howards contact is big but it will be gone before you know it and he still has value to the team — traugdog420
- Oh and beegal, Utley is not overpaid. Although injuries have obviously slowed him, his production is still excellent for a 2B, and his defense is well above average. Utley is still paid appropriately for his contributions. Only thing we agree on is that Victorino is a bargain, something I'm sure he plans to correct when he hits free agency.— Phils Phan 28
- based on what was said here you could see the phils trade a player like Kyle kendrick especially since they signed joel pinero— sdcaphil
- sdcaphil - Unfortunately at his current salary Kendrick has no trade value unless the Phillies eat most of his salary. If they have to pay most of his salary, they may as well keep him for insurance because he still won't generate much return.— Phils Phan 28
