How much does it cost to win a world championship? Apparently, just over $226 million. That’s how much the New York Yankees reportedly paid their players this year.

Today, the reigning world champs in baseball were assessed a luxury tax of $25.69 million as a result of their crazy spending. The Yanks are the only team to be hit with the tax this year.

The Yankees have been subject to the luxury tax every year since the tax began. They’ve paid a whopping 92% of all luxury tax collected by baseball since 2003 and won exactly one World Series for their trouble.

The only other teams that have been affected by the tax since its inception are Boston, Detroit and LA. Those teams have won a collective two World Series championships since the tax took effect. And by “those teams,” I mean Boston.

The Yankees spent more money on payroll than any other team this year. I know, I know, you’re going to start the whole “you have to spend money to win” argument. To that, I say, really? Last year’s world champs, those fabulous Phillies, spent less than half of that in 2008 when they won the big game (*throat clearing*). This year, the Phils, who made a great run to the World Series, spent just over half of what the Yanks did. Teams that spent more than the Phillies this year included the New York Mets, Chicago Cubs, Boston Red Sox and Detroit Tigers. And look how well those dollars worked out for some of them.

The limit for determining the luxury tax for 2010 is $170 million; it changes every year based on a system of averages. That limit means that the Yankees will find themselves doling out more dollars in luxury tax next year.

The luxury tax isn’t really a tax in the purest sense of the word. It’s more of a penalty imposed on teams whose payroll for the year exceeds the limit. The luxury tax is paid to Major League Baseball.

Interestingly, even though the luxury tax is sometimes referred to as the “Competitive Balance Tax,” the tax isn’t used to help smaller market teams at all. Instead, it’s used for a variety of other purposes, including player benefits and the promotion of baseball around the world. Ask the Pittsburgh Pirates how they feel about that…

(Note to my readers: I apologize for the offensive images at the top of the post. It makes me a little sick to my stomach, too.)

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Kelly Phillips Erb is a tax attorney, tax writer, and podcaster.

Comments

  1. Yes, every year there is someone who is not the Yankees that makes the World Series, but name one team in the last 20 years that has been in the playoffs as consistently as the Yankees?

    I’m a Cubs fan, and I have watched the Tribune Company flush payroll down the drain my entire life, with no world series to show for it (even with the great players that played in Chitown). Why? It’s not because of the money (even the Yankees have shown that it won’t always buy you success), it’s because of what the money can bring. Great players, solid leadership in the clubhouse, great managers, great coaches and rabid fan support.

    If the Luxury Tax made any difference in baseball then the Royals, Pirates, Reds, Indians and so many other lower echelon teams would have better players. The Phillies have good teams with great success because they are a good organization who have managed to get a lot out of low-cost talent. Just wait until Howard, Utley, Werth and Rollins hit the end of their contracts. When the salary requirements double or triple.

    The reason the Yankees are consistent is because they spend a ton of money, Philly has had a couple of great years, but unless they can fork over the cash to keep that team together, they’ll have to go through the same cycle that just about every team other than the Yankees go through.

    Go Cubs!

    • Greg,

      I agree re the playoffs – but what does that get them? Nobody ever remembers who comes in second in sports.

      But your point about the luxury tax is spot on: the idea behind the tax was to benefit those teams that aren’t in a position to spend more money. And it hasn’t. The money isn’t being re-distributed and the penalties aren’t enough to impact the big spenders.

      (PS: My grandfather was a big Cubs fan in the mid to late 80s. Good times.)

  2. Kelly,

    I would disagree that getting to the playoffs isn’t important, while the wider world may only remember who wins the World Series, individual team fans remember far more specifically.

    The Marlins are a great example of this. They have arguably been the most successful expansion team in the history of baseball, having won two world series since entering the league in the early 90’s. But as an organization they are struggling, because they are completely inconsistent.

    Imagine the luxury of being a Yankees fan, the privilege to look at every season and say “If we don’t win the world series, the season is a failure”. As a long-suffering Cubs fan, I would kill for the ability to not have to worry about whether or not I’ll even want to watch baseball in September.

    The Yankees are probably the greatest dynasty in all of sports. No team has been as consistently great as have the Bronx Bombers. When we speak of baseball greats the top 10 has at the very least 4 Yankees (Ruth, Gehrig, DiMaggio, Mantle), and in terms of modern baseball names like Munson, Jackson, Mattingly, Winfield and Jeter are synonymous with success.

    Money may not buy them a world series ring every year, but it buys them one thing no other team has, and that is the privilege of being the stick that all other teams are measured against. That is truly a luxury that they are obviously willing to be taxed for.

  3. Kelly,

    The Phils success-to-payroll ration has more to do other league rules that drive down a player’s market value. For the first six years of a player’s career, that player is “under reserve,” meaning that they have no right to seek a contract from any other club (this is a gross over-simplification and totally eliminates arbitration, but it’s close enough to get my point across). For the first year or two, players are paid the league minimum- period.

    However, once a player under reserve has established himself, it is typical for the club to offer the player a long term deal that extends well beyond the sixth year. For example, in February ’09 the Phils signed Ryan Howard (who was entering his sixth year) to a 3 year, $54M deal. Not chump change, but a fraction of his value in a competitively bid open market — I would estimate that he could fetch $25-30M per year on the open market.

    The Phillies employed a similar strategy to lock in Jimmy Rollins and Chase Utley — both developed in the Phillies farm system, and both capable of demanding a lot more than they are getting.

    On the whole, though, it’s really a tribute to the Phillies’ player development system for building such phenomenal players; and to GM Ruben Amaro for taking advantage of the system to keep quality players from leaving. When they are all old and wearing Yankee pinstripes for the money, the Phils will have a new crop of players.

  4. Charlie,

    The Phillies have been successful because of the organizational strength they have developed. I couldn’t agree with you more. Hopefully they will not abandon what has made them great (like my Cubs have so often done, mortgaging the future on weak hopes of winning now).

    Howard, Utley and Rollins will all most likely leave Philly when they become outright free agents, and the Phillies use of the arbitration system speaks volumes about them as an organization. Hopefully, well for Phillies fans anyways, they will be able to maintain their system and keep it going for a long time.

    Though at the end of the day, it’s hard to say that the Yankees money hasn’t helped them and they have 27 World Series Championships and 40 American League pennants to prove it.

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