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On Friday, the Red Sox agreed to a seven-year, $154 million extension with Adrian Gonzalez, whom they acquired from the Padres in a trade this past off-season.The timing of the contract has raised eyebrows because the parameters of the extension have been well-known since early December.
Why the delay? By waiting until the end of the second week of the season to announce the deal, the Red Sox appear to be circumventing Major League Baseball’s luxury tax.
The luxury tax (officially named the “Competitive Balance Tax”) is a tax on all salaries a team pays in a given year above a certain threshold. This year’s threshold is $178 million. As a team that has previously been subjected to the luxury tax, the Red Sox tax rate is 40 per cent.
To calculate a player’s impact on the luxury tax, Major League Baseball uses the average annual value of the contract (AAV) including signing bonuses for all years remaining on the player’s contract. With just one year remaining on his old deal, only Gonzalez’ 2011 salary ($6.3M) will be used in calculating this year’s luxury tax. If the Red Sox had not waited to make the extension official, Gonzalez’ AAV would have jumped to $17.8 million even though his 2011 salary remains unchanged.
And in the end, the fancy footwork will save the Sox millions. If the extension was included, Gonzalez would have cost the Red Sox $7.1 million in luxury tax. As it stands now, Gonzalez $6.3 million salary will only cost the Red Sox an additional $2.5 million (assuming the Red Sox were already over the threshold).
That is a savings of $4.6 million…or like getting Marco Scutaro for free this season.
One small irony of this deal is that by agreeing to wait, Gonzalez may have cost his fellow players more than $3 million in benefits. Of the money collected for the luxury tax, 75 per cent goes to fund players benefits. The other 25 per cent goes to “industry growth.”
As we explored recently, typically, only one or two teams pay into the luxury tax each season. So it will be interesting to see if Major League Baseball tightens up the language covering the luxury tax in the next Collective Bargaining Agreement.