Red Sox tax bill shows staying over threshold won’t break the bank

The Boston Red Sox received their 2019 luxury tax bill and it has us wondering why they are making a big deal about going over the threshold again.

The tax bill is due for the Boston Red Sox, penalizing them for owning the highest payroll in Major League Baseball in 2019.

According to the Associated Press, the Red Sox owe a record $13.4 million in luxury tax payments for exceeding the threshold for the second consecutive year with a payroll of $228 million.

As Alex Speier of The Boston Globe points out, this figure doesn’t seem to factor in the nearly $15 million in benefits that count for tax purposes. That would put the Red Sox 2019 payroll at around $243.6 million.

Boston was charged a 30 percent tax on every dollar spent over the $206 million competitive balance threshold, plus an additional 12 percent surcharge for exceeding the tax by over $20 million, which is how they arrived at the $13.4 million tax bill.

None of us enjoy paying taxes – it’s a necessary evil. The Red Sox backed themselves into a corner with several poor contract decisions. Paying the tax is now a necessity if they intend to contend for a championship next season. Their intended goal of shedding payroll to reset the tax penalties only serves to move them further away from their goal of hoisting another World Series trophy.

The $13.4 million tax bill may seem expensive to most of us but let’s put it in perspective.

The Red Sox paid Pablo Sandoval $19 million this year and his salary counted for $18.4 million for tax purposes. He hasn’t played for this team since midway through the 2017 season!  Boston still owes him $5 million for his 2020 buyout which will count towards the tax.

Dave Dombrowski lit $17 million on fire when he signed Nathan Eovaldi to a new deal only to receive replacement-level value from the right-hander this season. Boston is stuck paying Eovaldi that same salary for the next three years.

Dustin Pedroia‘s salary counts for $13.75 million towards the tax. He’s barely played in the last two years and may never see the field again.

The first base platoon of Mitch Moreland and Steve Pearce combined to earn $12.75 million this year. They also combined for a mere 0.7 WAR.

That’s a lot of money tied up in players who contributed little to nothing in 2019. Ownership had no qualms about those regrettable signings, some of which were highly questionable from the start. It’s a bit puzzling why those same owners are crying poverty now.

The penalties are harsher for third-time offenders. If Boston exceeds the threshold again in 2020 they will be charged 50 percent for every dollar over the tax. While that seems like a steep jump, there are some factors that mitigate the impact.

For one, the threshold rises from $206 million to $208 million next season, creating a bit of extra breathing room. Boston’s current payroll is estimated at about $231 million, well short of their taxable payroll in 2019. Even with the rising penalties, Boston’s 2020 tax bill wouldn’t be significantly higher than it was this year. If they manage to trim a few million bucks to squeeze into the first-tier of penalties, their tax bill next year could be less than $10 million.

Granted, this may seem like a staggering amount of money for must of us but it really isn’t in the grand scheme of things. Boston has been charged $50 million since the competitive balance tax system was implemented in 2003. The New York Yankees have been charged $348 million over that same span – more than the $324 million they will pay Gerrit Cole over the next nine years.

If Boston expects to compete in the same division as the Yankees then they will need to spend some money. Their billionaire owner, John Henry, can clearly afford it. That doesn’t mean spending recklessly or attempting to match the Yankees payroll every year. It means they shouldn’t act so desperate to shed salary. Nobody expected them to go after Cole or any of the other top free agents but they don’t need to hold a fire sale either.

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If they can find a taker for one of their overpaid starting pitchers, great, trade them for a couple of cheaper useful pieces. Just don’t salary dump them for nothing. David Price is more valuable to the Red Sox than he is as a trade chip. Perhaps a team blows the Red Sox away with a massive haul for Mookie Betts. Fine, they should consider it. Just don’t trade him for 10 cents on the dollar simply because you’ve failed to find another viable path to financial freedom.

Paying the tax may not be feasible every year and the Red Sox will eventually need to dip under to reset the penalties. Do you know what also isn’t feasible? Telling your fans that you’ve raised ticket prices after missing the postseason last season, then intentionally punting on the 2020 season by slashing payroll. Is that really the message ownership wants to send?

Maybe paying $10-15 million in taxes is worth it to avoid the risk of losing season ticket holders, merchandise sales dipping, and NESN ratings plummeting. That’s what will happen if they tell their fans before the season begins that they have no intention of competing.

The Red Sox should retain their best players in an effort to push for the postseason. If things fall apart as they did this year, Boston can always ship players away at the trade deadline and still avoid the tax.

Paying the tax will be worthwhile if it results in a deep playoff run, especially since much of that penalty will be offset by the revenue they can potentially generate during the postseason. Boston’s ownership group needs to stop treating this penalty that may cost them an extra few million as a tremendous burden when really it’s a mere slap on the wrist for an organization worth billions.