Red Sox resetting luxury tax penalties was about more than saving money

Money wasn’t the only reason the Red Sox reset the tax penalties.

This was a frustrating year for Boston Red Sox fans for many reasons, not the least of which was the team’s insistence on slashing payroll in order to dip below the Competitive Balance Tax. Instead of plugging a few holes to improve a club on the verge of contention, the front office went in the other direction by trading away their best player and shopping in the bargain bin to fill out the roster.

The result was a last-place finish in the competitive AL East and one of the worst records in baseball. Fans were furious that billionaire owner John Henry cared more about saving a few bucks from luxury tax penalties at the expense of putting a winning product on the field.

If only it were that simple. Sure, the escalating penalties for repeat offenders pile up to the point where the tax becomes more than just a burden. Henry might have plenty of money but at some point it just becomes bad business sense to cross the tax threshold every year.

It’s not just about the money though. We’re about to see why as we prepare for free agency to open next month.

Fans looking for a quick fix to launch the Red Sox back into contention will be eyeing the free agency market. Need a solution to the starting rotation issues? Look no further than National League Cy Young-favorite Trevor Bauer. What about an upgrade in center field to replace the departing Jackie Bradley Jr? Three-time All-Star George Springer will be available.

All it takes is money to land those star players and the Red Sox should be free to spend after resetting the tax penalties, right? Well, not exactly. Let me repeat – it’s not just about the money.

The top talent available in free agency will almost certainly receive qualifying offers from their current teams, which they are just as certain to decline. This means that in order to sign them, the Red Sox would need to surrender their second-highest draft pick.

A team’s top pick is protected. The Red Sox are expected to have the No. 4 overall pick in next year’s draft, assuming MLB sticks with the plan of determining draft order in reverse order of the 2020 standings. That coveted pick stays in Boston’s control no matter what free agents they sign.

The Red Sox would lose their second-round pick if they sign a free-agent who declined a qualifying offer though. There’s a currently unknown number of Competitive Balance picks between the first two rounds so it won’t be the No. 34 overall pick, but it would be a pick early in Round 2 that Boston would be sacrificing. That might not dissuade them from signing a top free-agent but it should at least make them hesitant, especially after they lost their second-round pick in this year’s draft as punishment stemming from the sign-stealing investigation.

Teams with a payroll that exceeded the $208 million luxury tax threshold in 2020 must forfeit their second-highest and fifth-highest draft picks. If the Red Sox had ignored the tax for a third consecutive year then signing one of these top free-agents would cost an additional draft pick.

A fifth-round pick might not seem like a steep penalty but keep in mind that Mookie Betts was once a fifth-round pick. He’s an example of how talented high school players can fall in the draft if they have a commitment to a college and therefore might be difficult to sign. The Red Sox overpaid slot value for Betts in the 2011 draft and got a tremendous bargain out of it. Losing a draft pick, plus the bonus money allotted to the slot value of that pick, deprives the team of these opportunities.

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The Red Sox need to focus on rebuilding their thin farm system. They’ve started to do so with some recent trades but the next step will be adding assets through the draft. Signing a top free-agent who declined a qualifying offer is counterproductive to that goal and should only be done if the player is a true difference-maker. If they had paid the tax this year and lost two draft picks, it would hinder their ability to restock the farm system.

The penalty for signing a player who declined a qualifying offer also includes the loss of $500,000 in international signing bonus pool money. That sum increases to a cool $1 million for tax paying teams.

Do the Red Sox want to risk missing out on the next Xander Bogaerts or Rafael Devers because they had limited funds to spend on the international market? A tax paying team that splurges in free agency will have a difficult time competing for international talent.

Under the reign of Dave Dombrowski, the Red Sox gutted the farm system and spent recklessly in a series of win-now moves. It paid off with a World Series championship in 2018 but eventually left them with a bloated payroll and few high-upside prospects to replenish the roster with. That’s not a feasible way to run a franchise in the long-term.

Boston’s brass has a goal to create a sustainable winner. That means managing payroll wisely so that they can reset the tax every few years without having to make massive cuts that send the team into the tank. It means having a steady pipeline of young players coming up through their system so that they have reliable, cost-effective young talent.

Slashing payroll in order to reset the tax in 2020 was a necessary move in order to get the Red Sox back on track for this goal. This plan wasn’t about Henry being a cheapskate who decided he no longer cares if his team has become a loser. It was about ensuring a future with a sustainable winner.