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Interesting Luxury Tax clause


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Basically any team that did not pay luxury tax in 2005 can blow their payroll through the roof in 2006 and not have to pay one red cent in luxury tax money.

In other words, any team that isn't the Yankees or Red Sox.

Mets, many others, can enjoy tax-free offseason

By Jayson Stark


Since finals are approaching, it's time for a little baseball-economics quiz to help us make sure you're fully educated on a key development in the 2005-06 offseason:

If the Mets' payroll inflates to, say, $150 million next season, how much luxury tax would they have to pay -- if the 2006 tax threshold is $136.5 million?

A) $3.04 million (22.5 percent)?

B) $4.05 million (30 percent)?

C) $5.4 million (40 percent)?

D) Way more than that, just because they're making Bud Selig really nervous?

E) Zero dollars (nada percent), because of a little-known technicality in the Basic Agreement?

OK, kids. Pencils down. All those answering "E" pass this test.

And if you answered that correctly, either you've spent way too much time reading the Basic Agreement online (and feel free; it's here) ... or you cheated.

But it's true. No matter how much cash the Mets insert in the wallets of free agents, Manny Ramirez, Carlos Delgado or all those talented and charming players they already have added this winter, their luxury tax next year is guaranteed to be exactly ... zilch.

Same with the Angels, who were No. 4 (just behind the Mets) in the 2005 payroll standings. Or the Phillies, who were No. 5. Or any other team not known as the Yankees or Red Sox.

That's because -- as first noted by CNN.com's Chris Isidore -- back in the crazed pre-agreement hours leading to the 2002 labor deal, the frenzied labor negotiators inserted a mysterious clause into the impending deal.

That clause says, essentially (in language way more complicated than this) that any team that didn't pay luxury tax in the 2005 season is 100 percent off the hook in 2006.

Doesn't matter by how much that team blows by the payroll threshold. Doesn't matter how many different tax rates are listed in the agreement for next season. Doesn't matter whether that team paid the luxury tax in any previous season. None of that matters.

So, unbeknownst to most of the sport, the only teams that face a potential tax bill next year are the Yankees (guaranteed to be taxed at 40 percent, as four-time offenders) and the Red Sox (who paid this year but probably won't pay next year unless their payroll goes up by $13 million). But that's it.

All righty then. We know what you're thinking: How the heck did a strange rule like this find its way into this labor agreement -- with just about nobody noticing?

Well, here's the story, as we've heard it:

You might remember that in the previous labor deal -- the first one to contain one of these payroll taxes -- the last year of the agreement was completely tax-free.

OK, even if you don't remember, trust us. It was.

Well, because of that wrinkle in the old deal, the union was pressing for the same free ride to be included in the current agreement. The idea was to give the market a year to adjust, in case the tax turned out to suppress player salaries more than anticipated.

Oh, and one more thing: That one-year gap was supposed to establish the principle that the two sides weren't necessarily committed to this tax forever and ever.

So naturally, as negotiations heated up, this issue remained a thorny little tug o' war. The owners didn't want any year to have no tax. The union was digging in. So in the end, they did what negotiators are supposed to do: They compromised.

And this was the compromise: No matter how much tax a team paid in 2003 or 2004, if it dipped under the threshold in 2005, it was safe from the tax man in 2006.

"I admit it's kind of quirky," says one baseball man who was involved in those talks. "But that's the compromise we came up with."

So now here we are, more than three years later. And here's that compromise, ready to take hold for this, the final year of the labor deal. But when we polled high-ranking officials of four teams last week, only one had ever even heard of this rule.

Why? Because MLB never mentioned it at the time the deal was done -- and hasn't advertised it since, even now that the time to apply that rule has arrived.

Matter of fact, MLB has never even advised the Mets (or the Angels or Phillies, either) that it could directly affect them -- and save them millions of bucks. Why? Because it obviously was hoping nobody would bother to read the fine print.

Oops. Somebody did. We didn't mean to blow anybody's cover. But someone needs to read this stuff -- and let the world know the rules. Sorry about that.

Meanwhile, there's one more reason this rule could be even more significant than it might appear:

We've been hearing murmuring beneath the surface that enough people in the sport are so happy with the current labor deal that they'd be interested in taking advantage of another clause in the agreement -- a clause that allows the two sides simply to extend the deal for 2007.

But if they just extend it, 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). Or they could negotiate yet another compromise on that particular issue.

Now it isn't likely the Mets will actually add enough dollars to their payroll (which was about $101 million this year) to have this wrinkle kick in. But it's possible.

Which means that, with a new TV network ready to hit the air, Mets GM Omar Minaya and his good friends, the Wilpons, have been handed the right to go on their very own fun-filled free-agent supermarket sweep.

All thanks to the Wacky World of Labor Deals. Gotta love it.

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