Thursday, July 26, 2012

Stuck in Neutral: The Red Sox Luxury Tax and Contract issues in 2012 and 2013

The disappointment that pervades the 2012 Red Sox season has lead to much gnashing of teeth among fans. Some want the team to go out and make big trades to acquire talent, some want to  see the team sell off all the bums, some want to see tweaks around the edges of the roster and some want to see the team stand pat.

The fact is that the Red Sox face some very challenging choices ahead.  The legacy of former General Manager Theo Epstein will be a very mixed bag when analyzed, the credit he deserves for helping construct two championship winning teams and a consistent contender is a huge accomplishment.  However as Epstein's tenure went on there was an increasingly dangerous pattern of long term and high priced contracts being handed out, most of which have turned out poorly.

At present the Red Sox are in a situation where in 2013 four players (Gonzalez, Crawford, Beckett, and Lackey) on the roster will represent $75.79 million against the luxury tax.

For 2012 and 2013 the luxury tax threshold is set at $178 million, this threshold raises to $189 million for the 2014-2016 seasons.

Steve Slowinski at Fangraphs illustrates why the luxury tax is such an important number to consider in roster construction:

And offenders will be charged the following tax rates, depending on how many years in a row they have been above the threshold 
First time: 17.5%
Second time: 30%
Third time: 40%
Fourth time and higher: 50% 
Any team that drops below the threshold will reset their luxury tax rate, dropping them back down to the first time rate (17.5%) if they should happen to go over the threshold again in the future.
According to an AP article on ESPN in 2010 the Red Sox paid $1.5 million in luxury taxes, in 2011 they paid $3.4 million in luxury taxes and almost all analysis of the current Red Sox payroll and obligations point to the Red Sox exceeding the tax threshold for a third straight year triggering the 40% penalty on money spent over $178 million.  Historically the Yankees have been the only team to consistently and severely exceed the luxury tax threshold as illustrated by Jayson Stark. Even though the Red Sox are a big market money machine of a team, they of an entirely different nature than the Yankees and actually have to operate within more defined budgetary restrictions.  The Red Sox aren't ever likely to go on a Marlins like payroll fire sale or sustain a Padres like payroll for multiple years, but the team has shown a reluctance to go past the luxury tax threshold with it's budget.

The key year for the Red Sox is 2013, if they can get under the $178 million luxury tax threshold next season then they can take advantage of the system in 2014.  There are two factors that come into play in 2014, the luxury tax threshold is going up by $11 million which gives the Sox more breathing room.  The other factor is that if they can reset their luxury tax rate to $17.5% then they can exceed the new higher luxury tax threshold with a much smaller hit.

Let's illustrate this point.

If the Red Sox end up with a 2013 payroll of $170 million then they would pay $0 million in luxury taxes and their rate for 2014 would be 17.5%.  The Red Sox could then spend say $200 million ($11 million over the tax threshold) in 2014 and only pay a luxury tax bill of $1.925 million.

If the Red Sox ended up with a 2013 payroll of $180 million they would pay $0.8 million in luxury taxes and their rate for 2014 would be 50%.  If the Red Sox then spent $200 million in 2014 they would pay a luxury tax bill of $5.5 million.

The difference in savings could be $3.575 million in 2014, enough to buy a valuable role player on the free agent market.  For comparisons sake, Cody Ross signed a one year $3 million contract for 2012.

Another perfectly reasonable scenario would be for the Red Sox to pay the tax again in 2013 and then use 2014 as the year to pull back payroll to get under the new higher threshold and reset their rate.

Let's explore the contract situations of the Red Sox roster and think about the hard choices that Cherington and the Baseball Operations crew will have to make.

Committed Money:

1B-Adrian Gonzalez: AAV $22 M. Years: 13-15 at $21 M, 16-18 at $21.5M.
LF-Carl Crawford: AAV $20.29 M. Years: 13:$20M, 14:$20.25M, 15:$20.5M, 16:$20.75M, 17:$21M
SP-Josh Beckett: AAV $17M. Years: 13:$15.75M, 14:$15.75M
SP-John Lackey: AAV $16.5M. Years: 13:$15.25M, 14:$15.25M
2B-Dustin Pedroia: AAV $6.8M. Years: 13:$10M, 14:$10M, 15:$11M club option ($0.5M buyout)
SP-Jon Lester: AAV $6M. Years: 13:$11.625M, 14:$13M club option ($0.25M buyout)
SP-Clay Buchholz: AAV $7.38M. Years: 13:$5.5M, 14:$7.7M, 15:$12M, 16:$13M club option ($0.245M buyout), 17:$13.5M club option ($0.5M buyout)
IF-Nick Punto AAV $1.5M. Years 13:$1.5M

Comments: Beckett has accrued 10/5 rights that allow him to veto any trade.  Gonzalez and Crawford both have limited no trade protection in their contracts.  Because they signed pre-free agency contract extensions Pedroia, Lester and Buchholz have AAV's that are very team friendly relative to their career and expected performances.  Of the three Buchholz if he has a good final few months of 2012 would have the most value in return because the acquiring team would have potential control of him through 2017.  Lester's 2014 club option voids if he is traded so he would be a 1 year rental unless the acquiring team can extend him.

Pending Free Agents:

DH-David Ortiz 2012 Salary $14.58M
SP-Diasuke Matsuzaka 2012 Salary $10M
OF-Cody Ross 2012 Salary $3M
C-Kelly Shoppach 2012 Salary $1.14M
RP-Vincente Padilla 2012 Salary $1.5M
SP-Aaron Cook 2012 Salary $1.5M
OF-Scott Podsednik 2012 Salary $0.75M

Comments: Ortiz, Ross and Cook seem most likely to return.  Ortiz is likely going to be for similar money and possibly multiple years, Ross will most likely be looking for a multi-year deal and Cook has performed well enough to probably get at least $4-5 million on the open market.  That leaves Matsuzaka as the only big money real coming off the books.

Arbitration Eligible Players:

CF-Jacoby Ellsbury (Arb3) 2012 Salary $8.05M
RP-Daniel Bard (Arb1) 2012 Salary $1.61M
C-Jarrod Saltalamacchia (Arb3) 2012 Salary $2.5M
RP-Matt Albers (Arb3) 2012 Salary $1.08M
RP-Alfredo Aceves (Arb2) 2012 Salary $1.2M
SP/RP-Franklin Morales (Arb2) 2012 Salary $0.85M
RP-Andrew Miller (Arb2) 2012 Salary $1.04M
SS-Mike Aviles (Arb2) 2012 Salary $1.2M
RP-Andrew Bailey (Arb2) 2012 Salary $3.9M
OF-Ryan Sweeney (Arb3) 2012 Salary $1.75M
RP-Rich Hill (Arb3) 2012 Salary $0.73M
RP-Scott Atchison (Arb1) 2012 Salary $0.51M

Comments: This is where things get ugly.  Most of the bullpen is arbitration eligible, Ellsbury is going to get more expensive and Saltalamacchia is going to get a big bump in salary.  Some of these arbitration eligible pitchers are simply going to be too expensive to bring back all of them.

Minimum Salary Players:

SP-Felix Doubront (On 25-man roster)
RP-Junichi Tazawa (SP Rank #12)
OF-Ryan Kalish (Post Prospect Status)
1B-Lars Anderson
SP-Stolmy Pimentel (SP Rank #18)
C-Ryan Lavarnway (SP Rank #4)
3B-Will Middlebrooks (On 25-man roster)
OF-Che-Hsuan Lin (SP Rank #35)
RP-Drake Briton (SP Rank #13)
RP-Mark Melancon (Post Prospect Status)
RP-Clay Mortensen (Post Prospect Status)
RP-Chris Carpenter
OF-Daniel Nava (On 25-man roster)
1B-Mauro Gomez (SP Rank #31)
SP/RP-Zach Stewart (Post Prospect Status)
IF-Pedro Ciriaco (On 25-man roster)
SS-Jose Iglesias* (SP Rank #5) (Iglesias' contract carries a $2.06 AAV based on signing bonus)

Comments: Some of the minimum salary guys on the 40-man roster are filler and need to be cleared off.  The most likely candidates to removed to me are Gomez and Ciriaco.  Anderson and Lin don't seem to be good fits on the Red Sox and should be dealt.

Options going forward: Trades, Non-tenders and Free agency:

Players to try to trade off the roster at 2012 trade deadline: 

Beckett and Crawford are the big names that you see if you can move at the deadline.  Beckett's performance and 10/5 rights make it difficult to move him, but a team looking for a veteran starter for the playoffs may talk itself into Beckett.  Crawford because of his elbow injury is probably untradeable at this point, if he makes it through the rest of the season healthy then he is a player you see if you can deal in the off-season.

Of the pending free agents, Ortiz, Matsuzaka, Ross, Shoppach, Padilla, Cook and Podsednik, all except Ortiz are tradeable.  Ortiz' 10/5 rights, DH position limitation and value to the franchise make trading him the ultimate white flag on the season.  While I think he would have a ton of value to a team like the Dodgers at 1B, I have doubts a team could talk itself into him playing 1B full time.  If I was GM I would try to deal Ortiz, but I don't think the current regime will.  All the other players from this group should be available, the return may not be great but the small amount of money saves, 40 man roster spots opened and minor league players acquired could be more helpful to 2013.

Of the arbitration eligible players, Saltalamacchia could be dealt if you wanted to capitalize on his power outburt and I would probably try to see if I could get more for him then for Shoppach.  Either way I think one of the catchers should be traded and Lavarnway given a couple months at the big league level before 2013.  Of the relievers Albers, Atchison and Miller, I think you need to trade two of these three, preferably Albers and Atchison if he can get healthy before the deadline.

Given the constant need of short stops Aviles may have a solid market value, but Iglesias hasn't shown his bat is capable enough to be the 2013 starter so I think you need to hold on to Aviles at least into this off-season.  Sweeney should be dealt for a reasonable return.

Of the minimum salary players, I think you need to deal Lars Anderson and Che-Hsuan Lin.  Anderson won't hit enough to be a DH, cannot play OF consistently and is blocked at 1B in Boston. Lin looks to be a career NL 4th OF/defensive replacement type.

Off-Season Trades:

This is where the big moves will be made if any are made.

You have to trade Jacoby Ellsbury this off-season.  There is virtually no way that the team can re-sign him unless they can trade Crawford.  The long term presence of Crawford and Gonzalez make it prohibitive to sign another position player to a $20M AAV contract.  Scott Boras is going to want to break the bank with Ellsbury after 2013.  As an elite performer when healthy, Ellsbury should yield a terrific haul of prospects and if he is traded during the off-season the team would receive free agent compensation should he leave.  If the team waits and trades him during next season the acquiring team would not receive free agent compensation.

Attempts to trade Beckett and Crawford should also be revisited during the off-season if they are not traded at the deadline.  These are contracts that severely limit the club's flexibility going forward.

Lackey because of his health is untradeable at this point and is someone you can try to trade during the 2013 season at the earliest.

Anderson, Lin, Gomez and Ciriaco are the four most vulnerable position players on the 40-man roster if the team is looking to open up spots.  For the pitchers Carpenter, Mortensen and Stewart are likely to be the first of the minimum salary guys out the door.  Mortensen has pitched well in AAA, Carpenter has been hurt most of the season and Stewart was the main return for the Youkilis trade. 

Free Agents Not Re-signed/Non-Tenders:

One path to payroll flexibility is to not re-sign David Ortiz.  The 36 year old DH is putting up an OPS above 1.000 at this point making it very hard for the Red Sox to justify not bringing him back even at the inflated salary of $14-15 million per season.  How long can this late career resurgence last? I don't think anyone really knows.

Matsuzaka will not be re-signed, I think the entire organization and fan base are tired of Dice-K.

Padilla is enough of a headcase if reports are to be believed that I don't think we see a return engagement for him.  Podsednik is simply roster filler at this point and it doesn't make much sense to re-sign him.

The other three, Ross, Shoppach and Cook could all be back depending on cost.  I think Ross' offensive performance will probably end up making him more expensive than the Red Sox will want to pay.

A glimpse at 2013:

Assuming for the sake of argument the players that the Red Sox are most likely to attempt to trade in this coming off-season are Beckett and Ellsbury, for vastly different reasons.  Lets ignore what potential return could be for these players and look at what their departures mean to the roster assuming that Ortiz is the only free agent that the Red Sox re-sign.




Bench C-Lavarnway
Bench Middle IF-Punto
Bench OF-Nava
Bench - Lin/Gomez/Ciriaco

So as you can see it is pretty easy for the Red Sox to field a 25-man roster based solely on players on the 40-man roster currently that are under contract for next season (except for Ortiz). There are also a number of minor league players that could be or will be added to the 40-man roster this off-season but that is a topic for another day.   The Red Sox appear to be an a rather curious spot that without a large volume of trading their isn't much room on the roster for Major League free agents this coming off-season.  It seems doubtful that all of the arbitration eligible relievers return and it is equally questionable whether or not they can find a taker on Beckett's contract.

It will be interesting to see where the dust settles for the Red Sox after the July 31st deadline, the August 31st Waiver trade deadline and once free agency opens after the World Series.  General Manager Ben Cherington is going to have to be creative this off-season.

Some good resources for payroll information used in this post include Cot's Baseball Contracts now part of BP,'s 40-Man Roster page, and Alex Speier of

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