Do you get docked draft picks in MLB for being over the luxury tax threshold? Rules, regulations, and penalties, explained

To promote payroll balance and discourage excessive spending on player salaries in MLB, the tax system in place imposes penalties on clubs that surpass a predetermined threshold. This is known as the MLB Luxury Tax or the Competitive Balance Tax.

For the 2023 season, the luxury tax threshold has been established at $233,000,000. Teams that exceed this threshold face an escalating tax rate, which varies based on the number of consecutive years they have surpassed the threshold.

The Luxury Tax implemented in Major League Baseball is designed to promote competitive balance by imposing penalties on teams that exceed the specified payroll thresholds. In addition to that teams that exceed the threshold get docked draft picks.

When a team surpasses the threshold, the penalties vary based on the number of times they have exceeded it. First-time offenders are subject to a 20% tax on the amount over the limit, which increases to 30% for second-time offenders.

If a team exceeds the threshold for three or more consecutive years, they face a higher penalty with a 50% tax on their excess payroll. These penalties affect not only their tax bill but also player benefits and potential draft pick positions.

The penalties associated with the MLB luxury tax have implications beyond just financial consequences, as they also shape a team's approach to roster construction.

The increased tax rates can restrict a franchise's capacity to acquire top-tier free agents, secure long-term player contracts, and allocate resources towards player development.

Which MLB teams exceeded the luxury tax threshold in 2023?

During the 2022 season, the Los Angeles Dodgers exceeded the first competitive balance tax threshold with a payroll of $293,330,382, surpassing it by over $60 million. Consequently, the club incurred a luxury tax bill amounting to $32.4 million.

In addition to the monetary penalty, the Dodgers were impacted in the 2023 MLB Draft. Their initial selection, originally slated at No. 26 overall, was moved back 10 spots, resulting in their first pick now being at No. 36.

The New York Mets made history by setting a new luxury tax payroll record of $299.8 million. This surpasses the previous record of $297.9 million held by the 2015 Dodgers and marks the Mets' first time incurring the luxury tax penalty since its inception in 2003.

In addition to the Mets, the NL champion Philadelphia Phillies, New York Yankees, San Diego Padres, and Boston Red Sox also exceeded the $230 million tax threshold.

Collectively, these teams incurred a total tax amount of $78 million, surpassing the previous high of $74 million in 2016 when six teams were subject to the luxury tax penalty.