Yankees Hit With Massive Luxury Tax Bill

It's almost tax season. Not for ordinary folks, though. It's for the organizations penalized for surpassing baseball's luxury tax threshold and for having the audacity to enhance their teams in free agency. In the case of the New York Yankees, they are set to pay the third-largest fee in a month, and it's another significant expense that Hal Steinbrenner presumably isn't too keen on.

According to Anthony Rieber of Newsday, the Yankees will have to pay Major League Baseball $61,774,820. This is for going over the $241 million threshold in 2025.

If you're curious why there have been more reports connecting the Yankees to players through trades rather than through free agency, this plays a part in that. For cost-conscious owners like Steinbrenner, it's easier to part with prospects than to open the checkbook a bit more.

Feb 19, 2021; Tampa, Florida, USA; New York Yankees general manager Brian Cashman and owner Hal Steinbrenner look on during spring training workouts at Yankees Players Development Complex. Mandatory Credit: Kim Klement-Imagn Images | Kim Klement-Imagn Images

The Dodgers are paying the largest tax bill in the sport. Their tax hit amounts to $169,375,768. It isn't the worst expense for the Guggenheim Group, though, considering they are coming off a second straight World Series win.

The Mets have the second-largest bill, and they probably aren't as happy as the Dodgers. They were hit with a $91,637,501 bill despite missing the postseason and inking Juan Soto to one of the biggest deals in baseball history, poaching him from right under the Yankees' noses, along with any other former member of the Bombers who become available. If Steve Cohen wants to add another Yankee to his beloved blue and orange and sometimes purple collection in Flushing, that bill will be hanging over his head.

Where the Money Goes

50% of this money goes to the player retirement fund, according to Mike Axisa of CBS.com. The other 50% goes to teams that do not surpass the prior year's competitive balance tax. Think the Pittsburgh Pirates, Tampa Bay Rays, or Miami Marlins.

Randy Levine, the Yankees' team President, has been outspoken about those small-market teams that benefit from these tax bills. In 2023, he specifically went after those aforementioned Florida-based teams.

"A lot more focus has to be on individual teams to do better and not just rely on revenue sharing," Levine said, according to RJ Anderson of CBS.com. "You can't have two Florida teams averaging 15,000 fans. You can't have it. You don't go into an NFL stadium or an NBA arena and see that.

"And I think that there's been a dependency issue that's got to get better," Levine continued. "The commissioner has done an incredible job, but now it's on individual teams. Instead of complaining and whining, 'We need more money,' you got to take some responsibility."

Aug 8, 2013; New York, NY, USA; New York Yankees president Randy Levine speaks at a press conference at Yankee Stadium. Two outdoor regular-season NHL games will be played at Yankee Stadium during the 2013-14 season as part of the 2014 Stadium Series. Mandatory Credit: Ed Mulholland-Imagn Images | Ed Mulholland-Imagn Images

Calculating the Luxury Tax and its Penalties

The way the luxury tax is calculated, teams that exceed the threshold are hit with a 20% tax on all overages, according to MLB.com. It's a 30% hit in the second year. For the third year in a row, it's a 50% tax hit. The bill is then reset if they go under the luxury tax.

Teams get hit with a little more if they go over the bill by a certain amount. They're hit with a 12% surcharge if they exceed it by $20 to $40 million. It's a 42.5% surcharge if they go over $40 to $60 million, and it increases to 45% for each consecutive year after. Then, a team that exceeds the luxury tax by $60 million has to pay a $60 million surcharge.

Exceeding the luxury tax isn't just about paying exorbitant fees. It also hurts draft positioning.

"Clubs that are $40 million or more above the threshold shall have their highest selection in the next Rule 4 Draft moved back 10 places unless the pick falls in the top six," MLB.com states. "In that case, the team will have its second-highest selection moved back 10 places instead."

It benefits owners just to be bad and not spend money. Billionaires get free cash for being cheap, and can even move up in the draft over those big spenders shelling out dough to them.

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