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December 5, 2005

Ghosts of 2002

Contraction, Luxury Tax Back on the Table as New CBA Dawns

by Neil deMause

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Funny things happen when people sit around a negotiating table. One minute you're dotting i's and crossing t's to put a halt to years of bickering and open warfare; the next, you've just agreed to swap Manhattan for a pile of nutmeg.

Something like that must have gone on in the waning days of baseball's labor talks in 2002, because the resulting collective bargaining agreement is filled with odd clauses that could only have been concocted at 4 a.m. after the coffee had run out. One of these is already having an impact in the world of stadium-building, where the deductibility of construction costs from revenue-sharing--aka "the Steinbrenner dodge"--has given teams like the Yankees a loophole by which to build new stadiums and force their competitors to help pay for them.

Then there are the clauses that lurk like time bombs, lying forgotten until years after the fact. As Chris Isidore and Jayson Stark have pointed out in recent weeks, the luxury-tax system agreed to four years ago contains an odd wrinkle in its implementation schedule:


                           TAX RATE FOR EXCEEDING THRESHOLD
                1st time    2nd time    3rd time    4th time
2003              17.5%
2004              22.5%        30%
2005              22.5%        30%         40%
2006                 0%        40%         40%         40%

That's right: First-time offenders in 2006 are exempt from paying any luxury tax at all, even if they sign Johnny Damon, A.J. Burnett, and John Flaherty for $20 million apiece, or something equally silly. And "first-time" here refers to consecutive offenses, meaning that only teams that broke the $128 million payroll threshold last year--that would be the Yankees and Red Sox--have to worry about paying tax this year.

The luxury tax has hardly been the catastrophe for players that some had feared, largely because Don Fehr managed to set the bar high enough ($117 million in 2003, scaling up to $136.5 million in 2006) that very few teams have had to worry about it--the only clear casualty so far has been the Yanks' failure to pursue Carlos Beltran last winter. Still, when you're talking about two teams paying a 40% premium that the rest of the league doesn't have to worry about, that's an economic incentive that should make even pennant-starved baseball owners sit up and take notice. You think George Steinbrenner didn't notice that if he'd offered Brian Giles the same $10 million a year the Padres did, it would have ended up costing him $14 million next year once his tax tab is figured in? (Add in the Beltran non-signing, in fact, and you could make an argument that the biggest beneficiary of the luxury tax might end up being Bubba Crosby.)

Likewise, being absolved from the tax effectively gives other teams a 19% discount on their off-season purchases over this year's $136.5 million payroll cap. So far, though, no one seems to have taken the bait. Of the three teams Isidore identified as likely cap-busters this winter, neither the Angels nor the Cards have been aggressively taking on salaries (unless you count taking on Hector Carrasco as "aggressive"); the Mets may have added Carlos Delgado and Billy Wagner, but they'll still be hard-pressed to bust the limit thanks to the dispatch of Mike Cameron to San Diego, especially if Omar Minaya succeeds in dumping Kris Benson's contract for a bag of beans. Meanwhile, the tax-ridden Red Sox continue to pile up payroll like it's going out of style. Clearly there's no accounting for accounting when it comes to GM hot stove logic, or lack thereof.

Next year, though, things could get even more interesting. Stark writes that if the owners and players agree to play an additional season under the current CBA rather than conduct a knock-down drag-out before the end of 2006, "they would be extending another tax-free year along with it (a potentially monstrous advantage for the Red Sox in 2007 if they pay no tax in 2006)." But in fact, as the late Doug Pappas reported back in 2002, the luxury tax officially expires on the last day of the 2006 season, so if the two sides decide to keep playing in 2007 without a new contract, the luxury tax disappears entirely. If nothing else, that--coupled with the possibility that the revenue-sharing structure could be overhauled yet again in the next labor agreement--could loosen the Yankees' pocketbooks again next winter. Don't sign a long-term lease, Bubba.

Luxury tax shenanigans, though, pale in comparison to what could be the baseball bombshell of 2006: The return of contraction. When Bud Selig & Co. agreed to shut their yaps about eliminating teams during the 2002 labor talks, they exacted an enormous concession from the labor side: Starting in 2006, MLB owners are free to eliminate two teams if they so choose--without needing the approval of the players' union. Owners have a three-month contraction "window," from April 1 to July 1, in which time to notify the union that contraction is imminent for 2007. And--this is the key part--they don't need to identify which two teams are on the chopping block.

Given what we know about Bud and his gang of Seligians, it's easy to see how this would play out. Sometime next spring, probably a moment conveniently picked to coincide with the Florida and Minnesota legislative sessions, the baseball cabal puts out the word that two teams will get the axe the following year. Immediately, panic ensues on sports pages across the nation, as baseball writers fearful of being consigned to the high-school field hockey beat send up the alarm that Something Must Be Done.

Certainly, plenty of teams seem to be readying themselves for a run at oblivion. The Marlins are the obvious lead candidate, given that Jeff Loria and Number One Stepson David Samson--frustrated by the Florida legislature's unwillingness to throw money at their stadium woes--have already announced that they intend to depart Florida, though without actually specifying a destination. The Twins, Royals, and A's owners are all engaged in similarly fruitless stadium battles, and could conceivably be persuaded to take a buyout. The Devil Rays are a perennial candidate for extinction, given that it might take years for anyone to notice they were gone. And even the newly minted Nationals could find themselves in the rumor mill, if the D.C. city council carries through with threats to reject the team's lease agreement for its yet-unbuilt stadium amid steadily rising construction cost estimates.

Of course, there are lots of reasons not to take threats of contraction seriously. It would be hideously expensive, for one thing--can you seriously imagine MLB giving up $450 million in Nats sale price just to marginally increase everyone else's share of the pie, or even paying the $300 million or so that it would cost to buy out Loria or Carl Pohlad? Add in the inevitable legal tangles--the states of Minnesota and Florida each threatened lawsuits the last time contraction was floated--and wiping out teams quickly looks like more trouble than it's worth.

But contraction doesn't have to be a serious threat to be an effective bludgeon. If all these stadium deals are still in legislative limbo next summer, MLB can play the contraction card and set up a game of musical chairs: Last two cities to build stadiums get left out in the cold!

And best of all from MLB's perspective, there's nothing in the CBA saying that if baseball announces it plans to contract, it has to go ahead and carry out the threat--meaning that even if its bluff is called, it could back off and suffer no worse than a bruised public image. Heck, Selig could probably sell himself as a hero for lifting the stay of execution and maintaining the status quo.

Maybe his labor negotiators knew what they were doing after all. Even without coffee.

Neil deMause is an author of Baseball Prospectus. 
Click here to see Neil's other articles. You can contact Neil by clicking here

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