Now that the Red Sox have actually traded Mookie Betts (and his salary) and David Price (and half of his salary), Boston has followed through on its intentions to significantly reduce payroll. Much has been made of the Red Sox’s desire to stay under the competitive balance tax threshold. In September, team owner John Henry said this:
“This year we need to be under the CBT [competitive balance tax] and that was something we’ve known for more than a year now,” he said. “If you don’t reset, there are penalties, so we’ve known for some time now we needed to reset as other clubs have done.”
Then, in January, Henry said this:
I think every team probably wants to reset at least once every three years.
Henry’s full remarks from January also include an assertion that competitiveness is more important than getting under the tax threshold, although the team’s eventual trade of Mookie Betts strongly undercuts that argument. According to our calculations on the RosterResource Red Sox payroll page, Boston’s payroll for the competitive balance tax is roughly $199 million, nearly $10 million under the first $208 million competitive balance tax threshold. If the Red Sox stay at that level this season, they will spend $56 million less on payroll and competitive balance taxes in 2020 compared to their 2019 outlay.
It’s worth exploring how much the Red Sox are set to save if they get under the tax threshold this season and the form those savings would actually take. At the Boston Globe, Alex Speier outlined a scenario whereby the Red Sox could get under the tax amount this year, and determined the team’s potential savings through 2022. The piece did a good job of delineating the different types of savings the Red Sox could expect to enjoy, as I expect there are some misconceptions about what the penalties actually amount to. While Speier looked through 2022, that year will be the first year of a new Collective Bargaining Agreement so it is difficult to know what, if any, savings will be present then. Let’s examine each of those penalties (and their effect on the team) in turn.
The Competitive Balance Tax
This is where I suspect most people assume the biggest savings are. Teams can reset the tax amount to lower levels, then go over the tax amount and reap the savings. In Speier’s example, the Red Sox go back up to a $243.5 million payroll in 2021. The taxes saved are right around $10 million next year. If you want to include the tax savings for 2020 compared to a $243.5 million payroll, we can add another $20 million in savings, though that’s generous given that the Sox could have non-tendered Jackie Bradley Jr., kept Betts and Price, and shot for 90 wins while paying just $7.5 million in taxes.
But assuming that the Red Sox would go back up to a $243.5 million payroll in 2021 might not be best, though, either. Even with assumed arbitration raises for 2021, the Red Sox commitments look to be a little under $180 million. In order to get payroll back up to $243.5 million, the Red Sox would need to spend about $65 million in new money next winter. Given that the departing Mookie Betts is the only great free agent available next offseason, it would likely take three sizable signings to get up that level. The last two teams to famously reset did not make that kind of splash.
In 2018, both the Yankees and Dodgers were able to reset their tax amounts. In 2019, the Yankees increased payroll, but only to $234 million, which meant a tax bill of $6 million instead of $14 million. The Dodgers didn’t even go back over the threshold in 2019, so resetting in 2018 got them no tax savings at all. Both clubs probably got some of that A’s money, but likely not more than $10 million per club. Even this season, with the Yankees set to go $50 million over the tax amount, their savings compared to having not reset comes to just $10 million. The tax savings aren’t nothing, and you might be able to afford Jordan Lyles with that money, but they really only amount to $5 million to $10 million per year unless a team is going to up payroll beyond $275 million.
To be clear, teams that go over the tax thresholds, no matter by how much, do not lose any draft picks. If a team goes over the tax threshold by more than $40 million, their top draft spot drops by 10 spots (the top six picks in the draft are exempt from this rule). Keep in mind, this penalty is triggered by going $40 million over the cap amount regardless of whether a team was under the tax threshold in previous seasons; resetting their tax amount has no effect. In any event, the penalty is only worth about $3 million. It’s true that the draft pick compensation the team would receive for players who depart in free agency with a qualifying offer attached would be lessened, and moving from the end of second round to the end of the fourth round is worth roughly $1.5 million. But the team would have to retain Betts to even suffer that loss, so it doesn’t really apply here. And if they were over the competitive balance tax threshold, signing a player who had received a qualifying offer would result in the extra loss of a fifth round pick ($2.5 million in value) and $500,000 more in international pool money ($2 million in value). But again, that loss is more theoretical as it requires the Red Sox to go sign a free agent with a qualifying offer.
A’s Revenue Sharing Money
Last January, I wrote about a quirk in the current CBA that takes part of Oakland’s revenue sharing money and gives it back to teams like the Yankees, with reductions in the amount a team is set to receive if that team goes over the competitive balance tax threshold in at least two consecutive years. The Oakland A’s reside in a large market and large-market teams are typically prohibited from getting revenue sharing money. Any revenue sharing money that large-market teams would receive gets redistributed to the teams paying into revenue sharing. The A’s had an exception to that rule because of their poor stadium situation, but the amount they could receive declined over the last few years and will hit zero in 2020.
The amount Oakland was set to forfeit last year was 75% of their revenue sharing cut, which was expected to be around $40 million. It’s possible their increase in attendance and their playoff run made that amount a little bit less, but if we assume that the $40 million figure is correct, then $30 million would go back to teams paying into the revenue sharing pool. If we assume around $500 million changes hands between the high and low revenue clubs (with Oakland slightly over the average amount), and the Red Sox pay 15% of the revenue sharing pool, then last year, the Red Sox would have received $4.5 million of their $75 million payment back. Because the club was over the tax amount two years in a row, they would have only ended up with $3.375 million, forfeiting $1.125 million. If the team went over the tax amount in 2020, they would forfeit half of their share of Oakland’s money (now the full $40 million) and thus would get just $3 million of the $6 million. In 2021, they would receive $1.5 million of the $6 million they would otherwise be entitled to.
In this scenario, Boston getting under the tax threshold in 2020 would net them just $7.5 million extra over the next two seasons (this is where I differ the most from Speier’s calculations). If we wanted to push the Red Sox’s rebate higher, keep in mind that means that revenues move significantly higher, too. If the Red Sox paid 20% of revenue sharing money instead of 15%, their penalty for 2020 and 2021 for going over the tax amount would increase to $10 million, but it would also mean the club’s revenues are roughly $100 million higher over those two years, combined with their existing average revenue, which is some $200 million higher than the average club’s (without accounting for their 80% stake in NESN).
(Here it’s worth noting that competitive balance tax penalties like the ones the Red Sox have been paying aren’t some small-market windfall. The first $13 million is divided equally among all teams to defray player benefit costs, with 50% of the remaining amount going toward the same and the rest split among all non-tax paying teams. Even including the player benefits portion, teams ended up with a little under $1 million each last season.)
The Real Savings
Even in the above scenario where we assume the Red Sox immediately take payroll beyond $240 million again, the savings beyond this season are minimal. The Oakland revenue sharing money in 2020 and 2021, plus the 2021 tax savings, amounts to just $20 million in the above scenario. The real savings (or rather, the increased profits if we’re being accurate), come from simply reducing payroll. The Red Sox appear to be reducing their payroll below prior expectations by about $40 million in 2020; combined with the tax savings, that means $60 million less spent on payroll for the Red Sox this season with only $20 million in savings elsewhere. The real benefit isn’t resetting the penalties to reduce future costs; it’s in reducing current costs.
Before last season, Forbes estimated the Red Sox’s profits at $84 million. They did win the World Series, so perhaps that figure is $30 million or so above a normal year, though the Red Sox also drew more fans in 2019 than they did in 2018, which likely mitigated the lack of a playoff run somewhat. In any event, it seems reasonable to believe that the Red Sox were quite profitable last season. They will likely be more profitable this year despite actively making themselves worse. The narrative teams like to point to every three years about the benefits of resetting their competitive balance tax penalties undersells where the real savings come from. Teams are just grabbing a bunch of cash today, and using future savings as an excuse for that windfall.
Craig Edwards can be found on twitter @craigjedwards.