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.

News and Notes

  • 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.