Major League Baseball Finances, Part 2 The Boston Red Sox

Major League Baseball Finances, Part 2 The Boston Red Sox

Introduction

In an earlier piece, I examined Major League Baseball (MLB) finances. It was notable that the Boston Red Sox, normally viewed as one of the successful big-market teams, appeared to be in financial straits. That is, after deducting last year’s ticket and TV revenues from payrolls, only $25 million remained. This was less than any other team and could easily have been used in other team expenses. Of course John Henry, the principal owner, could pay for “overages.” But unsurprisingly, Henry said that in 2020, payrolls have to be dramatically reduced to get under the luxury tax limit. In what follows, I look at the Red Sox situation with thoughts on how it might all work out.

The Luxury Tax

In part to reduce the financial differences among teams, MLB every year sets a luxury tax payroll threshold. For teams whose payrolls exceed this threshold, taxes will be imposed: a club exceeding the Competitive Balance Tax threshold for the first time must pay a 20% tax on all overages. A club exceeding the threshold for a second consecutive year pays 30% percent, and for three or more straight seasons of exceeding the threshold pays a 50% luxury tax. The threshold for 2020 will be $208 million.

The Boston Globe reported that:

Henry said that in 2020, the Red Sox “need to be under the luxury-tax threshold and that was something we’ve known for more than a year now.” Werner later clarified that it was a strong preference rather than an absolute.

I quote further from the Globe:

In 2018, when the threshold was $197 million (with tax rates at the three thresholds of 20%, 32%, and 62.5%), the team spent past the third and highest threshold in a championship season. In 2019, with a luxury tax threshold of $206 million (with tax rates of 30 percent, 42 percent, and 75 percent), the team will spend over $240 million, incurring roughly $12 million in taxes, but staying below the highest tier of $246 million. In 2020, the team wants to get below the first luxury tax threshold of $208 million (when the tax rates would be 50%, 62%, and 95%).

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