The Yankees have paid the luxury tax every season since the tax’s inception. In 2011, the Yankees’ tax rate was 40% — the highest possible rate under the previous CBA. That means the team’s tax rate in 2012 is 42.5% and will be 50% in 2013. But if the Yankees keep payroll below $189 million in 2014, it not only avoids the tax that season, but it also lower the team’s luxury-tax rate for 2015 to only 17.5%. That’s right, avoiding the luxury tax for just one year re-sets a team’s tax rate to the lowest under the CBA.
Even for the Yankees, the difference between a 50% tax rate and a 17.5% tax rate is significant.
So, for example, if a team’s payroll for 2012 was $185 million, that team would be taxed on $7 million ($185 million – $178 million). But what’s the tax rate? That depends. The rate is tied to a team’s luxury tax history. If the team wasn’t assessed a tax in the prior season, then the tax rate is 20%. If the team paid the luxury tax in 2011 at a 22.5% rate, then the tax rate for 2012 is 30%.
A 30% luxury tax rate in 2011 would yield a 40% rate for the same team in 2012. And a 40% luxury tax rate in 2011 would mean a 42.5% rate in 2012. For the seasons 2013 through 2016, the initial rate goes down (from 20% to 17.5%), the 30% and 40% tax rates stay the same and the 42.5% rate shoots up to 50%.