The Rays' hidden free agent advantage

‘‘We have no state taxes, and it’s always 80 degrees.’’ - former Orlando Magic coach Doc Rivers's pitch to free agents - Steve Dykes-USA TODAY Sports

For some baseball players, it's all about the dollars. For the Rays, it's about dollars and sense

The budget constraints of the Tampa Bay Rays have been so well publicized over the last several years that the narratives have become old. Every offseason is dominated by stories about the Rays losing top performers to free agency, trading away high priced pitchers, and scavenging in the market for players high payroll teams won't touch. This past season, the Rays maintained the third lowest payroll, ahead of only the atrocious Marlins and Astros. Even the media darling Oakland A's spent more than the Rays. The difference in payrolls is obvious when comparing the Rays' payroll to the other teams in the AL East. When Boston spends only $60,000,000 on new players in free agency, it's considered a thrifty offseason.

A partial list of offseason and midseason acquisitions in 2013 of the Rays and Red Sox:

Boston Red Sox
Player Salary
Jake Peavy $16,157,271
Ryan Dempster $13,250,000
Shane Victorino $13,000,000
Matt Thorton $5,500,000
Jonny Gomes $5,000,000
Mike Napoli $5,000,000
Koji Uehera $4,250,000
Total $62,157,271
Average $8,879,610

Tampa Bay Rays
Player Salary
Yunel Escobar $5,000,000
Jesse Crain $4,500,000
David DeJesus $4,250,000
Roberto Hernandez $3,250,000
Kelly Johnson $2,450,000
James Loney $2,000,000
Wesley Wright $1,025,000
Jamey Wright $1,000,000
Delmon Young $750,000
Total $24,225,000
Average $2,691,667

A partial list of starting pitchers' salaries for the Rays and Red Sox:

Boston Red Sox Rotation
Player Salary
Jake Peavy $16,157,271
John Lackey $15,950,000
Ryan Dempster $13,250,000
Jon Lester $11,625,000
Clay Buchholz $5,750,000
Total $62,732,271
Average $12,546,454

Tampa Bay Rays Rotation
Player Salary
David Price $9,831,954
Roberto Hernandez $3,250,000
Matt Moore $1,100,000
Jeremy Hellickson $503,000
Alex Cobb $502,200
Total $15,187,154
Average $3,037,431

Price discrimination is a theoretical behavior in markets where consumers have perfect information and perfect substitutes available. Consumers then pick the product that maximizes their utility. This idea can also be applied to baseball free agency. Local taxes (especially state and municipal income taxes) can be viewed as a cost and therefore a price by free agents. Players have all the necessary information, such as offers from different teams and knowledge of tax rates in different parts of the country, to assume perfect information. Different teams are not truly perfect substitutes, as players have different preferences and teams match these preferences to varying extents, but resemble substitutes to a reasonable degree. Teams that play in similar markets with similar talent levels are closer to perfect substitutes. The free agent market is a factor market, where players supply a good (playing services) to the firms (teams). When a player is choosing between two perfect substitutes, the player is indifferent between the two and a change in wages will cause a complete substitution toward the team offering a higher wage.

Two teams that make for a good comparison are Oakland and Tampa Bay. Both teams have similar talent levels and operate in similar fashions. It may be that both teams offer the same player a contract and the player would have to choose between the two. The player would then choose to offer his labor to whichever team offered a higher wage. This is where the assumption of perfect information and Tampa Bay's advantage come into play. If this player had an offer from both teams for the same amount of money (identical pretax wage), he would sign with the Rays in this construct. Tampa Bay is, obviously, located in Florida, a state with no income tax while Oakland is in California, a state with a very high marginal tax rate. Therefore, the after tax amount of money earned by the free agent is lower in Oakland than in Tampa Bay. Although a formula exists to correct for this difference, (Alm et al. 2011) it is extremely difficult to put actual numbers or a percentage on the difference between the post tax amounts earned as games in played in different locations are subject to that city and state's income tax (for instance, games the Rays play in Oakland subject Rays players to Oakland and California's taxes).

The difference between a player's pretax and post tax income is no trivial matter; players and agents are aware of the difference and behave accordingly. Agents will demand a larger contract for their clients from teams in a state with an income tax in order to increase their own earnings and to be able to list a larger number of the contract obtained for their client. Players who are being traded to a team in a city where the tax rate is higher will often demand a pay raise. Charles Johnson refused to waive his no trade clause after the 2002 season without a pay raise when traded from the Marlins to the Rockies. It is reasonable to assume that players will similarly demand more money in the free agent marketplace as well. The Rays won't make up a $97,000,000 difference in payroll due to a five percent higher tax rate in Boston but may be able to make up a roughly a five percent difference in payroll (Oakland) when athletes are filing in California as opposed to Florida.

Of course, there are many other factors at play, both in the tax arena and beyond. Married players with dependents can file joint returns while single athletes file by themselves. However, the formula referenced above does an adequate job of modeling the differences. The Rays, however, use other tricks to attract free agents.

The Rays tend to sign under-appreciated veteran players to one year contracts, minimizing risk of the signings don't pan out while motivating the player in what amounts to a contract year. The Rays have been particularly good in continually revamping a bullpen that gets raided annually by larger budget teams. Players like Rafael Soriano, Grant Balfour and Joaquin Benoit have been signed to contracts the Rays couldn't or were unwilling to match. Their departures didn't set the Rays back; they have been able to sign other veteran relief pitchers to short term deals (as well as continuously developing talent in the farm system). By now, veterans know that they can come to Tampa Bay and play out what essentially serves as an audition year for other teams. Some may take a pay-cut, which acts to the Rays' benefit. The Rays have an excellent track record with low priced free agent signings in recent years. This speaks to the organization targeting the right players and getting the most out of players that may have failed with other organizations.

Jeff Keppinger PA BA OBP Slugging OPS+
2011 400 .277 .300 .377 90
2012 418 .325 .367 .439 126
2013 451 .253 .283 .317 62

Casey Kotchman PA BA OBP Slugging OPS+
2010 457 .217 .280 .336 73
2011 563 .306 .378 .422 127
2012 500 .229 .280 .333 72

Above are a couple examples of hitters having career years with the Rays before moving on. Both Kotchman and Keppinger set three year highs in all of the rate stats listed in their year with the Rays. Both additionally experienced a substantial drop-off the following year.

Keeping the bigger picture in mind, as the Rays enter the offseason, it will be interesting to see who they target in free agency and who they lose from this year's squad that probably deserved better than a lose in the ALDS. Don't be surprised to the see the Rays use their advantages to acquire the players they want for next year's run.

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