The luxury-tax implications of Aroldis Chapman’s Yankees extension

The luxury-tax implications of Aroldis Chapman’s Yankees extension

The Yankees stayed relatively payroll neutral when it comes to the luxury tax with their extension for Aroldis Chapman.

Chapman could have opted out of the final two years at $30 million left on his five-year contract by midnight Saturday. Instead, he accepted a one-year extension in 2022 for $18 million.

So that means he has three years at $48 million now left on his contract or $16 million on average per year. And the luxury tax formula takes the average value of a contract.

However, the average value on Chapman’s previous five-year, $86 million dollar pact was $17.2 million — and that is what the Yanks were charged toward the tax each of the past three years. But they paid Chapman $56 million over that time or $18.67 million. Thus, there is a true-up charge that must be accounted for between what the Yanks ultimately paid and what they were charged in the luxury tax.

That true-up means Chapman will cost the Yanks $17.5 million annually toward the luxury tax payroll for the next three years. The Yanks begin the free agency period with 10 signed players that count for roughly $154.5 million toward the $208 million threshold for 2020. Those players are Chapman. Masahiro Tanaka, Giancarlo Stanton, Jacoby Ellsbury, J.A. Happ, Zack Britton, DJ LeMahieu, Aaron Hicks, Luis Severino and Adam Ottavino.

Each team is charged roughly $15 million for items such as insurance and pension. So that would take the Yankees to $169.5 million. Assuming the Yanks remove Greg Bird and Tyler Lyons through trades or releases, they have nine arbitration-eligible players (James Paxton, Tommy Kahnle, Gary Sanchez, Aaron Judge, Chad Green, Jordan Montgomery, Luis Cessa, Gio Urshela and Jonathan Holder) who MLB Trade Rumors projects will make $34.6 million through the process.

That would take the Yankees to $204.1 million and they would get close to the first threshold simply with the non-arbitration-eligible players needed to fill out a roster (think Mike Tauchman, Tyler Wade types).

The Yankees do not publicly divulge what Hal Steinbrenner’s payroll mandates are. But if the Yankees owner wants the team under the second penalty level of $228 million, then without trading a salary or two they have roughly $20 million to spend or $40 million before they would trigger the third penalty level of $248 million.

Think of those numbers as you consider if the Yankees will willingly go to more than $30 million annually for Gerrit Cole or Stephen Strasburg — maybe up toward $40 million annually for Cole. Whether they can even comfortably make the $17.8 million qualifying offer to Didi Gregorius. Or even give $5 million-to-$10 million perhaps to retain Dellin Betances, considering the $44 million-ish 2020 projection already for relievers Chapman, Britton, Green, Kahnle and Ottavino.

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