A few weeks ago, we learned that GM Kevin Towers had an eye on Masahiro Tanaka. In the words of Nick Piecoro, “Towers didn’t just say his club liked Tanaka, he said the Diamondbacks hoped to be in the mix to sign him.” Just like international signing dollars under the new system, however, posting dollars have a different value than payroll dollars for some but not all teams. For that reason, I was more than just dubious at the time of the GM meetings:
I think the chances of Arizona landing Masahiro Tanaka are microscopic — Arizona’s payroll is low enough that posting dollars are no different than payroll dollars. The D-backs would undoubtedly get outbid by a team closer to the luxury tax threshold; for a team like the Yankees, Red Sox or Dodgers, spending money on posting fees looks more appetizing.
Of course, money is money and, some teams have more money than others. But what I was referring to above is the effect of the luxury tax (formerly known as the “competitive balance tax”). Since the new posting system is a little different than the old one, I have to revise my position. We’re also hearing that with a $20M cap in place, the Rakuten Golden Eagles might not even post Tanaka. I think the inquiry is still interesting, though, so let me start by explaining what I mean about how posting dollars don’t cost as much as payroll dollars for some of the teams with higher payrolls than Arizona.
Although the Phillies came close, only the Dodgers ($234.5M) and Yankees ($236.2M) exceeded the $178M luxury tax threshold in 2013 (for luxury tax purposes, payroll is calculated differently than we might see elsewhere — it’s calculated using average annual values to prevent escaping tax through backloading or frontloading contracts). The threshold changes next year to $189M, and odds are that the same two teams are the only ones at risk for exceeding the new threshold in 2014.
We’re hearing so much about the Yankees’ efforts to get under $189 not because they’re in mortal fear of ever paying a luxury tax dollar ever again, but because they’ve exceeded the limit so many years in a row that their luxury tax in 2013 was set at 50%. If they have their payroll calculated at $190 in 2014, they’ll pay a few hundred thousand dollars in luxury tax — but more importantly, their luxury tax rate will not reset. If they remain over the threshold in 2015 and subsequent years, the luxury tax implications could be enormous.
Both Daisuke Matsuzaka and Yu Darvish signed six-year contracts after being posted, and we can expect that if Tanaka is posted (and there is now some doubt on that), he will be signed to a six-year pact as well. Six years is right in the sweet spot for clubs — short enough to limit the biggest risk, but long enough to justify a significant posting fee. Accordingly, when we’re talking about luxury tax implications, we’re talking about the next six years, not just 2013. If a team is able to sign Tanaka at a below-market rate because of posting fees paid, that might help them stay under the luxury tax threshold as far out as 2019.
That means that we aren’t just talking about the Dodgers and Yankees when it comes to the difference in value between payroll dollars and posting dollars. The Red Sox have exceeded the luxury tax threshold before, and they are likely to do so again (although I doubt they ever will for more than a year or two in a row). At least by 2019, a handful of other clubs could be up against the limit, including the Giants, Phillies and Angels.
If signing Tanaka at a below-market rate because of a posting fee has an effect on hitting the luxury tax threshold, therefore, we’re looking at it affecting value for two tiers of teams.
The second tier (Red Sox, Angels, Giants, etc.) is the easiest one to think about — they’re the teams that are unlikely to stay above the luxury tax threshold for more than one year at a time. Assuming that a dollar spent on posting fees is a dollar saved on Tanaka salary (and that might be assuming too much), and guessing that the posting fee can only depress Tanaka’s salary by 50% at most, we’re looking at a posting dollar being worth about 90% of a payroll dollar for such teams. For example, pretend that $5M in posting dollars made Tanaka’s 2014 salary $15M, rather than $20M. If the $15M was all past the luxury tax threshold, the team would owe $2.625M in luxury tax. If the $20M spent had all been payroll dollars and paid luxury tax on all of it, the tax would be $3.5M. In that example, a posting dollar cost the team only 85% as much as a payroll dollar. In this tier of teams, we’re thinking that they’d only hit the threshold some of the time, and since the extent to which posting dollars would depress Tanaka’s salary is impossible to know, I’m comfortable guessing that for the second tier, a posting dollar costs the team only 92.5% as much as a payroll dollar.
The first tier (Dodgers, Yankees) is much more complicated. In this tier, we’re guessing that the below-market discrepancy is likely to save 30% (second-year rate) and 50% (four or more years rate) of the shortfall, most if not all of the time. We can use the same example as above. For a $20M salary, the club might pay as much as $10M in luxury tax. If $5M of the salary is converted to non-taxable posting dollars, the luxury tax can only be as high as $7.5M. Since a payroll dollar in this example costs $1.5, and a posting dollar still costs just $1, in this example, a posting dollar cost the team only 67% as much as a payroll dollar. The Dodgers have only little hope of falling back under the threshold during the next four years — still, they’ll be taxed at 30% in 2014 and 40% in 2015, rather than the full 50% that they’re at risk for in 2016-2019. That means that for the Dodgers, a posting dollar will cost only 73% as much as a payroll dollar (approximately).
There’s an additional issue in play for the Yankees, because if they can “reset” their luxury tax rate, they might save quite a bit of money. If Tanaka gets posted relatively soon, the Yankees might not know definitively what their risk is for going over the $189M threshold (especially with the A-Rod suspension up in the air). If shifting payroll to posting in Tanaka’s case helps them sneak under the threshold, then the posting dollar is worth much, much more than the payroll dollar in the short term. Still, in the same situation, the Yankees would end up as a second tier team, with the dollar for dollar savings going forward being more like the 92.5% rate above. I’m not going to pretend that I can factor everything in, here, but giving it my best guess, I think that for the Yankees, a posting dollar will cost only 70% as much as a payroll dollar.
Yankees bidding against the Diamondbacks
Compare the position of the Yankees, then, to the position of the Diamondbacks. Both teams walk into a local store that sells batting practice balls. Neither team really needs new batting practice balls, and there are other stores that sell them. Some of the balls are available for $10 per ball, to any buyer (these are the balls analogous to Tanaka’s salary). To get all of the balls, though, you have to buy a set of additional balls (the balls analogous to the posting fee), and the price changes — they cost $7 for the Yankees but $10 for the Diamondbacks. The store decides all of the balls have to be sold to one party. Since the balls are cheaper, overall, for the Yankees, it’s more likely that the Yankees will view the overall sale price as a good deal. Now consider that the Yankees have a lot more money — dollars are not as precious to them. Since they have more money, they might have paid even more for the balls than the Diamondbacks are willing to pay — but they only have to pay less.
In circumstances like those, I think the Diamondbacks’ chances of getting Tanaka are “microscopic.” The luxury tax and the the luxury tax threshold make an uneven market even more different, and the inefficiency essentially rules out the D-backs unless they value Tanaka much, much higher than the Yankees do.
There’s a huge inefficiency created by the luxury tax and tax threshold. On a smaller scale, we’ve seen a similar thing play out with free agents who have declined qualifying offers — because of the lost draft pick, those free agents just aren’t worth quite as much to the other 29 teams. This is a real effect.
That’s the situation under the previous posting system, though. The new one has a cap, which evens out the inefficiency a bit.
Capping posting fees
With posting fees now capped at $20M, the Diamondbacks are no longer at such a disadvantage. It’s not that the percentages above change — posting dollars still do not cost as much as payroll dollars for the Yankees, Dodgers, and several other teams. For the Diamondbacks, both kinds of dollars are still equal. But the cap does limit the extent to which the luxury tax teams can shift payroll dollars to posting dollars. Without a cap, the posting fee might have been as much or higher than Tanaka’s salary. With a cap, Tanaka will almost certainly get several times more than that (maybe $100M for six years). It’s like the Yankees and Diamondbacks are back in the balls store, with the same situation, except much fewer balls are offered to the Yankees at a discount. The inefficiency created by the luxury tax and luxury tax threshold is much less significant.
Not so fast!
With a cap in place, a procedure becomes necessary for awarding the chance to sign Tanaka (or other posted players) if there are multiple teams that submit bids at the cap limit. From what I understand, there was some discussion about using reverse winning percentage, a system that might have helped Arizona. Instead, the NPB-MLB agreement allows the posted player to pick from the teams that bid $20M.
That’s a pretty big problem for Arizona: in most respects, the posting of Japanese players will be much like free agency. A willingness to put up $20M for a posting fee will limit the market to something smaller than 30 teams, but not by much. Let’s say there’s still 10 teams, and let’s say they were the 10 teams that were most likely to bid high on Tanaka anyway. Do you like Arizona’s chances? Because I don’t.
With teams like the Mariners, Dodgers, Cubs, I think Arizona almost certainly gets outbid. To win that bidding, Arizona would probably have to overpay, and I think Towers is smart enough to not do that. But who knows? Maybe Tanaka would really like living in Arizona, or maybe only 2-3 teams put up a $20M posting fee. It’s possible.
With the new posting system, Arizona’s chances of landing Tanaka are no longer microscopic. But being visible by the naked eye doesn’t make Arizona’s chances very good.
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