A Draft Luxury Tax?

Earlier this week we heard that draft bonuses were the last major issue to be resolved in the Collective Bargaining Agreement, with Bud Selig pushing for hard slotting.  Since then we’ve heard that hard slotting is pretty much dead, although Buster Olney reports that the changes that are now being discussed involve a luxury tax on total draft spending.

MLB has a luxury tax on total payroll, which only really affects three teams.  The payroll figure goes up every year, and the Yankees pay almost all of the luxury tax.  Unlike revenue sharing money, the tax money goes to MLB’s central fund, rather than being distributed to other teams.  The Yankees, and other teams, haven’t been restricted from spending big due to the luxury tax.  They’ve just had to pay a bit extra to spend over the limit.

It would be a bit harder to add a luxury tax for the draft.  A team with the first overall pick is obviously going to need a higher ceiling than a team with the 30th overall pick.  The first overall pick could cost four to five times as much as the 30th overall pick, which would make it easier for the team with the 30th overall pick to go over slot on more players in the later rounds, without paying a tax.

The tax wouldn’t prohibit teams like the Pirates from going over-slot on players, but it might limit them.  As a hypothetical example, say the ceiling is at $16 M.  Let’s say the Pirates also have spent $15.9 M after they get their top few picks signed, but they get an agreement from a later round pick for $200 K.  Under the current system, they’d end up spending $16.1 M.  With a luxury tax, that final player wouldn’t just cost $200 K.  He’d cost $200 K, plus whatever the tax is.  If the tax is around 10% of the total spending, the final player would essentially cost $1.8 M.

Olney also reports that there has been talk of giving additional picks to low revenue teams, which would be great for teams like the Pirates who are low revenue, and go over slot with their picks.  Again, this would be difficult to incorporate in to a luxury tax system.  If the Pirates, or any other team, received extra picks, their tax ceiling would have to be adjusted.

The tax system doesn’t limit bonuses like hard slotting would, but it might end up limiting bonuses in a smaller way, depending on the tax ceiling.  In the last four drafts, the Pirates have spent $9.8 M, $8.9 M, $11.9 M, and $17 M from 2008-2011 respectively.  If a tax ceiling were to be set at $10 M, the team could still go over-slot, although if they wanted a big second round pick like Stetson Allie or Josh Bell, they’d probably have to pay a tax.  A tax could also limit spending in the ways outlined above, by preventing teams from taking chances on a low cost guy that might put them over the limit, thus inflating the cost of that one player.

It will be interesting to see how this plays out.  There definitely needs to be a sliding scale, to allow a higher ceiling for teams with early picks and extra picks.  I’m against any kind of limitations to draft spending, as this is how teams like the Pirates can get game changing players.  It seems ridiculous that Selig would fight so hard to limit draft spending in an off-season when we will probably see six players receive $100 M contracts.  Every team in the majors can afford to spend $17 M in one draft if they wanted to, and it wouldn’t affect the franchise for the long term.  For most teams in the majors, a $100 M contract severely limits their payroll for the long term.  The real inequity is payroll and the free agent market.  That’s what needs to be fixed.  The reason teams go over slot is because free agency and the payroll differences are such a mess.  Any attempts at reducing over-slot deals just adds to the unbalanced playing field in baseball.

Enjoy this story? Pirates Prospects will be switching to a subscription site on 4/13, so that we can continue bringing you the best Pirates coverage there is. For a very small monthly price, you can continue getting articles like this, along with coverage from every minor league city. Get more information here, and subscribe today!

Share This Article

Tim Williams

Tim is the owner and editor in chief of Pirates Prospects. He started the site in January 2009, and turned it into his full time job during the 2011 season. Prior to starting Pirates Prospects, Tim worked with AccuScore.com, providing MLB, NHL, and NFL coverage to various national media outlets, including ESPN Insider, USA Today, Yahoo Sports, and the Wall Street Journal. He also writes the annual Prospect Guide, which is sold through the site. Tim lives in Bradenton, where he provides live coverage all year of Spring Training, mini camp, instructs, the Bradenton Marauders, and the GCL Pirates.

2011-2012 Off Season Primer

Next Story »

CBA Updates: Draft Slotting Notes

  • Anonymous

    Great article Tim!  I couldn’t agree with you more on this topic.  The draft is the best way for the Pirates to add players that should make them competitive some day.  Why does Bud Selig want to mess with that?  The Pirates are spending tens of millions of dollars yearly on the draft and not throwing $100 million dollar contracts at the Alfonso Sorianos & Jayson Werths.  This is a non-issue in my opinion.

Latest Analysis

  • Gregory Polanco

    Q&A: Trading Prospects For Rentals, Polanco Concerns, Meadows vs Appel

    11 hours ago

    I missed the Q&A last week due to a common problem in Spring Training: I forgot what day it was. It was around 6:00 that I was ...

    Read More
  • Nick Kingham f

    Improving His Two-Seam Fastball will Make Nick Kingham a More Effective Pitcher

    2 days ago

    With Jameson Taillon returning from Tommy John surgery, and unlikely to make an impact at the Major League level early in the year, the top prospect to ...

    Read More
  • Arquimedes Caminero 3

    The Roster Situations That Could Impact the Makeup of the Pirates Bullpen

    4 days ago

    There are less than two weeks remaining in Spring Training, and the one area where the Pittsburgh Pirates had actual position battles is heating up. There were ...

    Read More
  • Jordan Luplow

    How the Pirates are Trying to Stay Ahead of the Curve With the New Draft Rules

    5 days ago

    The 2011 Collective Bargaining Agreement brought a lot of changes to Major League Baseball. The biggest change for the Pittsburgh Pirates came in the draft. From 2008-2011, ...

    Read More
  • Alen Hanson

    The Key For Alen Hanson to Help the Pirates in the Majors This Year

    5 days ago

    When the Pittsburgh Pirates moved Alen Hanson to second base last year, part of the plan was to get him to the majors faster by putting him at ...

    Read More
  • Tyler Glasnow 2

    What the Stats Don’t Tell You About Tyler Glasnow

    7 days ago

    The stat line for Tyler Glasnow’s start at Pirate City yesterday looked great: 3 IP, 0 H, 1 R, 1 ER, 1 BB, 1 K. The lone run ...

    Read More
  • JaCoby Jones Josh Bell

    JaCoby Jones Did Fine in the Move to Shortstop, But Needs to Cut Down on Strikeouts

    1 week ago

    The Pittsburgh Pirates drafted JaCoby Jones as an outfielder in the third round of the 2013 draft, then surprised everyone the following year when they moved him ...

    Read More
  • Cody Dickson is a lefty with the upside of a middle of the rotation starter. (Photo Credit: Mark Olson)

    The Mental Adjustment that Led to Cody Dickson’s Dominant 2014 Second Half

    1 week ago

    Trusting his stuff and not trying to do too much — that has been the key for left-handed pitcher Cody Dickson so far in his professional baseball ...

    Read More
  • Third Base Mathisen Luplow Joe

    Who’s on Third? In the Pirates’ Farm System, It Could Be Anyone

    1 week ago

    If you have ever played third base in your life — professional, college, high school, slow pitch softball — then the Pittsburgh Pirates might be contacting you ...

    Read More
  • Jason Creasy

    Another Pitcher to Watch From the Pirates’ 2011 Draft

    2 weeks ago

    The 2011 draft is shaping up to be a great class for the Pittsburgh Pirates. They picked first overall that year, so naturally you’d expect good things ...

    Read More
  • Browse More Articles

    More