Jacoby Ellsbury contract & Yankees luxury tax ramifications

Long known as baseball’s big spenders, the Yankees may be ponying up more money than even they intended this offseason.

Dec 4, 2013, 4:08 AM UTC

Jamie Squire

The Yankees for most of the 2013 season said a "serious goal" for 2014 was to stay under the $189 million mark in an effort to avoid MLB's luxury tax. So far, it doesn't look like that goal will be reached.

Tuesday night, the Yankees came to an agreement with free agent outfielder Jacoby Ellsbury on a seven-year deal worth $153 million. A week-and-a-half ago, they signed catcher Brian McCann to a $85 million contract. Second baseman Robinson Cano is still a free agent and New York is serious about wanting to keep him. The Yankees also want to sign a starting pitcher for next season. And have made offers to Omar Infante, Shin-Soo Choo and Carlos Beltran. All of a sudden, the costs are adding up quickly and keeping under the $189 million threshold is no easy task.

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Why are the Yankees, long baseball’s main moneybags team, concerned about the luxury tax, or as baseball calls it, the competitive balance tax? Simply put, it stands to cost them a lot of money. Under baseball’s CBA, a team exceeding $189 million is forced to pay a sum equating to a percentage of the difference between the team’s salary and the luxury tax cap.

A team in their first year of exceeding the cap is required to pay 17.5 percent of the difference. That jumps to 30 percent if a team is above the threshold a second consecutive year, then to 40 percent in the third straight year and finally 50 percent in the fourth consecutive year and any year beyond that. The Yankees, having been above the tax threshold for several seasons, would be required to pay half of the difference between their payroll and the $189 million tax threshold in 2014, the maximum rate.

However, if the Yankees do not exceed $189 million next year, but do in 2015, their payment resets to just 17.5% of the difference. Thus the reason New York would like to stay under that dollar amount.

The Yankees entered the offseason with around $100 million owed to eight players for 2013. McCann will receive $17 million in 2014 and Ellsbury will average just under $22 million per season. That pushes New York's payroll up to $139 million just with ten players. Five Yankees players are also eligible for arbitration, including Brett Gardner and David Robertson. MLB Trade Rumors projects those players to receive another $15 million.

If the remaining 10 roster spots are filled by players receiving something around the league minimum, the Yankees opening day payroll currently stands at roughly $159 million, or just $30 million below the luxury tax.

While that is a lot of room, it could be filled by just Robinson Cano. That leaves no space remaining for someone like Hiroki Kuroda, to whom the Yankees have offered $15-16 million. There certainly would not be any room for Japanese ace Masahiro Tanaka, who is expected to be posted as soon as a new agreement is made between the MLB and Japan. He could receive a bigger deal than Yu Darvish got from the Rangers.

Of course, there is one wrinkle involved in the Yankees' offseason plans that could open up an additional $26 million in salary room: the appeal hearing of Alex Rodriguez for his 211-game suspension. If that punishment is upheld, Rodriguez loses his salary for that time and it is not counted against the Yankees' books. However, if Rodriguez is successful in his appeal and is not suspended or receives the standard 50-game vacation that a first-time offender would normally receive, New York is suddenly more strapped for cash than it would like.

For now, however, it appears the Yankees may be less worried about the tax than they previously had been. Either that, or the team is counting on Rodriguez’s suspension to be upheld or are no longer planning on making a hard run for Robinson Cano. Otherwise, New York has some financial magic to work to stay under $189 million and still sign the players it would like.