Question

The following table shows the luxury tax threshold for MLB and Boston Red Sox payroll over 2012 - 2017. Year Luxury Tax Threshold Boston Red Sox Payroll 2012 178,000,000 179,859,051 2013 178,000,000 174,994,264 2014 189,000,000 174,313,058 2015 189,000,000 219,647,612 2016 189,000,000 215,875,101 2017 195,000,000 192,745,428 The luxury tax for an MLB team was 17.5%, 30%, 40%, and 50% depending on whether the team exceeded the threshold for the first, second, third or fourth time. Any team that drops below the threshold will reset their luxury tax rate, dropping them down to the first time rate (17.5%) . You can see that the Red Sox exceeded the threshold for the first time in 2015, and for the second time in 2016. How much was their luxury tax bill in 2015 an 2016?

Answer 1

1. CORRECTION:

Red Sox exceeded the Luxury Tax threshold first in 2012.

A. Luxury tax threshold in 2012 - 178,000,000

B. Red Sox Payroll in 2012 - 179,859,051

Exceeded the payroll limit by 1,859,051. Luxury tax applicable in 2012 as well; at 17.5% on the amount exceeding the limit.

2. PREMISE:

As per the Rules, since the team dropped below the threshold from 2013, the Luxury tax rate is reset to 17.5% in 2015. Again in 2016, the team exceeded the limit. hence the rate applied will be 30%. Rates are applied ONLY on the amount exceeding the payroll limit allowed for each year.

3. CALCULATION OF LUXURY TAX BILL:

	Year	2015	2016
1	Payroll Limit	189,000,000	189,000,000
2	Actual payroll	219,647,612	215,875,101
3	Amount exceeded (2 -1)	30,647,612	26,875,101
4	Luxury Tax rate	17.50%	30%
5	Luxury Tax bill (3 x 4)	5,363,332	8,062,530