There’s Really No Reason for Cubs Ownership to Be Concerned with Luxury Tax Penalties

Cubs chairman Tom Ricketts recently made the media rounds to discuss, among other things, the team’s financial position. He warned of the dangers of wasting money on luxury tax penalties and explained that “you can’t really buy teams, you have to build them.” The Yankees proved him correct on that front, yet I cannot help but suspect that Ricketts is still fundamentally wrong in his general thought process.

While money cannot guarantee another Cubs World Series title, spending it does increase the odds of winning. So even if top free agents are expensive lottery tickets, buying more of them means having a better chance at having one pay off big. The Nationals passed on Bryce Harper, but they rode a big-money rotation of Max Scherzer, Stephen Strasburg, and Patrick Corbin to a championship.

As we documented last offseason, the Cubs are in a unique position because they actually need to outspend the rest of the NL Central to just keep pace. That’s because they do not get supplemental draft picks allotted to small-market teams. While Ricketts is absolutely correct that there needs to be a focus on drafting and development, the Cubs must pump more money into those areas to offset the “free” picks awarded to their opponents.

Choosing not to spend on free agents does not miraculously make a team better, it just makes ownership richer. Sure, the Cubs would have been better off spending Jason Heyward’s money on Zack Greinke in 2016. But avoiding free agents because you might pay the wrong one is like avoiding the draft because you might pick the wrong player.The only reasons to avoid spending money on a team are if you are tanking (not applicable to the 2020 Cubs) or to make an equivalent investment in extensions for current players (applicable to the 2020 Cubs).

On a more fundamental note, however, I want to discuss Ricketts’ comments about the luxury tax. I am already on record about my distain for that mechanism, but my concerns center on it costing players money. Ricketts, on the other hand, dislikes the luxury tax because it wastes his money and because its redistribution of wealth most certainly offends fiscal conservatism. If he did not want to pay the luxury tax, maybe his family should not have bought a big market baseball team.

The Ricketts were advised during their initial research into purchasing the Cubs that the real payoff was in long-term franchise valuation growth. In other words, the real money is not in annual profits but in the windfall reaped by selling the team. A Deadspin article from March based on a trove of Ricketts family emails made clear that (1) the family was advised that franchise value increase was a “bulletproof investment” and that (2) franchise value increases dwarfed annual cash flow increases, i.e. annual profits.

Because only 30 MLB franchises exist, they are artificially scarce and will rise in price regardless of either on-field success or profitability.  Even the woeful Marlins were sold for twice their estimated value, netting a $1 billion profit in 2017. So whether they make a dime in profit on an annual basis, the Ricketts family will make billions if and when they eventually sell the Cubs. With that in mind, why would anyone complain about an $11 million tax bill?

Ownership has pledged to reinvest all Cubs profits back into the team, yet in January, they “reinvested” $107.5 million by purchasing the remaining 5% minority stake from the Tribune. While this purchase was technically a reinvestment, it also only benefited the owners while doing nothing to enhance the franchise itself. Now I should clarify that the Cubs have absolutely spent big over the past four years, as payroll grew at a faster pace from 2014-17 than any other team I can think of.

My concern is that the Ricketts are laying the groundwork for being cheaper than they need to be in the future. The Cubs’ revenue supported roughly $230 million in payroll and luxury tax last season and there is no excuse not to spend at least that amount this season. I can understand allocating more to one-year contracts and less to six-year deals, but the Cubs should be paying the luxury tax for the simple reason that they can afford to.

What’s more, the players they sign above the penalty thresholds will statistically increase their odds of a playoff run. Either way, the real money for ownership comes from selling the team and won’t be significantly impacted by losing a few million in taxes along the way.

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