Red Sox must play into September this season to reset luxury tax for 2021
Even a start to the 2020 Major League Baseball season is no guarantee that the Red Sox will reset their luxury tax rates.
In order for the team’s luxury tax rates to “reset” for the 2021 season — something that would remove one disincentive to pursuing free agents in the offseason and spending beyond next season’s 2021 luxury tax threshold of $210 million — the season must be played beyond the Aug. 31 trade deadline. So, if the scheduled 60-game season ends before September, no team would pay the luxury tax, and teams’ luxury tax statuses would revert to where they stood at the end of the 2019 season.
In the case of the Red Sox, a season that ended before September would result in the team entering 2021 as if they had paid the luxury tax in each of the two prior seasons. That outcome could have consequences for how the team approaches the 2020-21 offseason.
The trade of Mookie Betts and David Price in February was motivated in part by the team’s desire to get its payroll under $208 million for the coming year and, in the process, to reset its tax rates. If the Sox reset their tax rates, they would pay a tax starting at 20 percent and topping out at 65 percent on payroll above $210 million in 2021. If they don’t reset, they would pay a tax starting at 50 percent and topping out at 95 percent on payroll above $210 million.
Additionally, if there’s no reset, the Sox could face the potential loss of tens of millions of dollars in revenue-sharing rebates in the coming years, though it’s worth noting that COVID-19 crowd restrictions may alter the scale of that rebate. Revenue-sharing has been canceled for the 2020 season.
Obviously, luxury tax rates won’t be the only factor in how the Sox choose to spend their money in this winter’s market. Revenue losses in a shortened 2020 season and potentially beyond (if crowd capacity remains restricted) likely would have a bigger impact on how the team approaches the market. So, too, would opportunity in a winter when the free-agent market is expected to be depressed, potentially opening the door for a team with resources to capitalize.
Nonetheless, the Sox had pursued a reset for a reason, and a season that ends up abbreviated beyond the current 60-game schedule would represent a setback in that regard. By contrast, the teams whose payrolls have them in line to pay luxury taxes in 2020 — the Yankees, Astros, Dodgers, and Cubs — would not be hit with a bill and would have their future luxury tax penalty structure revert to their end-of-2019 statuses.
While teams are going to pay only prorated salaries to players this year (with only 60 out of 162 games on the schedule, players will receive 37 percent of their anticipated full-salary earnings), the full-season, average annual value (AAV) of their contracts will be used to determine payroll for luxury tax purposes. So, even though J.D. Martinez will make just under $9 million in salary this year, his salary will count for $23.75 million for luxury tax purposes.
The Red Sox currently project to have a payroll for luxury tax purposes of under $200 million.