CBA Scenarios: The New Luxury Tax
The start date for the 2011/12 NBA season has already passed and yet the league its players are still far from a deal.
What remains is still a sizable a gulf in which the union will consider/accept a punitive luxury tax system along with 52.5% of Basketball Related Income (BRI) going to the players.
The alternative solution for the NBPA would be a 50/50 split with almost the same Collective Bargaining Agreement (CBA) as the one that expired.
The owners want 50% and their Supertax system.
So far neither side is willing to budge any further. Talks will resume over the weekend even now as various players continue to explore the option of decertification, which could blow up the entire season and send negotiation to the courts.
In addition to providing a profitable environment for ownership, the NBA has insisted that a limit on team spending be installed to provide some level of parity.
Behind the scenes, the smaller markets (who outnumber the larger money-makers) are the pushing aggressively for a spending cap while the union has been firm that a hard (or flex) cap is not an acceptable option.
The answer is a compromise on system/tax and revenue split, but can either side get there before the season is lost?
Based on the information available, the owners are asking for a progressive tax that jumps an additional half-dollar in tax for each five million in payroll (over the threshold).
Where the tax in the last deal was a flat dollar-for-dollar, the owners want to start the penalty at $1.75.
A team at $20 million over the line would pay $8.75 million for the first $5 million, $11.25 million for the second, etc. to total out at $50 million in tax.
The players’ version starts at $1.25 and climbs by 25 cents initially in $5 million increments (but with an uneven progression).
There’s also disagreement on the starting point of the tax by $2 million. If the league wants a threshold of $70 million, the players would be at $72 million. A team spending $90 million in payroll would pay just $27.75 million in tax under the players’ proposal as opposed to the aforementioned owners’ plan of $50 million.
The NBA wants to seriously discourage teams from constantly living in the tax so they’re tying strings to habitual offenders including an increased tax rate, no sign and trades and no Mid-Level Exception.
Naturally the NBPA is adamantly opposed on all fronts. They’ll go with a somewhat stricter tax but don’t touch their exceptions.
To help teams adjust to the Supertax system, the new CBA is likely to have an Amnesty Clause which would allow teams to cut a single player for tax (and cap) savings.
The Orlando Magic, who are hoping to find a way to keep center Dwight Howard long-term, would stand to save a sizable amount by cutting Gilbert Arenas and the remaining $62.4 million left on his contract.
How that might impact each of the 30 teams was mapped out earlier in the week (CBA Scenarios: The Amnesty Cut).
Most teams will be able to get under the tax with Amnesty. Will the vast majority curb their spending and stay under the line at all costs? Would it act, as the players fear, like an unofficial hard cap?
Last season generated $72.7 million in tax, paid for by just six teams.
The Los Angeles Lakers, Mavericks and Magic made up the bulk of that at about $19.6 million apiece. The Boston Celtics and Utah Jazz chipped in a combined $10.7 million. The Portland Trail Blazers ($2.3 million) and Houston Rockets ($800k) put in the rest.
For the sake of this analysis, pencil in a tax threshold of $71 million which is the middle-point between the owners’ and players’ proposals.
Looking at each team’s projected salaries for the coming year (without accounting for lost games), there may not be many taxpayers.
The top three will probably still be on the hook with the Lakers already looking at $91.1 million in payroll invested in their 11-player roster. If Luke Walton is let go via Amnesty, the team would still be $16 to $20 million over the tax.
If LA does spend slightly north of $90 million, tax could make the total expense $140 million under the owners’ proposal.
If that $50 million tax-bill represented most of the Lakers’ revenue sharing contribution then the team might be open to such an extremes but if they’re also sending in millions to support the small-market teams? That may be more than owner Dr. Jerry Buss can handle.
The new CBA may also include a Stretch Exception that allows a team to cut a player and spread their tax/cap hit over twice the remaining contract (plus one additional year).
The Mavericks technically have the means to get under the tax given that Jason Terry’s $10.7 million contract is only guaranteed at $5 million, Brendan Haywood can be amnestied and free agents Tyson Chandler, J.J Barea and Caron Butler come off the books.
Coming off their championship season, look for Dallas to try and keep most of the roster together. Terry’s money is safe and the Mavs could easily end up in the $80 million range in pretax payroll.
For the Magic, using the Amnesty on Arenas and possibly the Stretch Exception on Hedo Turkoglu could turn Orlando from a significant taxpayer to a team slightly under the cap.
The caveat is that Orlando would still be on hook for both salaries worth over a combined $30 million this coming season. Amnesty/Stretch won’t solve everything but they may better options than paying the tax on players who don’t contribute anywhere close to their compensation levels.
Other tax teams might include the Celtics, Blazers and Spurs.
If Boston intends to re-sign restricted free agent Jeff Green along with unrestricted players like Glen Davis and Delonte West, tax could become an issue.
A partial solution for the Celtics might be cutting Jermaine O’Neal with their Amnesty but then who on the roster plays center?
If Boston believes they can compete yet again for a title, they may feel it necessary to climb into the tax bracket, although they may toe the line at the $5-10 million over mark.
The Blazers are toying with bringing back Greg Oden (restricted) but are already at about $72 million in payroll. Amnesty might solve the problem, especially if they let Brandon Roy and his knees go (or in a less dramatic move, Marcus Camby).
The San Antonio Spurs are also looking like a low tax team but Amnesty may do the trick as well (Richard Jefferson).
Just the threat of tax may curtail spending for teams, which is obviously something the players are trying to avoid. Look for teams to structure their salary to limit their tax exposure.
The players aren’t wrong when they say the league wants to use the tax as a de facto hard cap.
If the union can is able to keep their exceptions, guaranteed contracts and earn a healthy BRI split, the lockout would be over quickly.
Instead, November 1st came and went without a season opener.
The difficult part is getting to consensus given the owners want their bigger cut of BRI and a (theoretical) even playing field for each and every team.
The players have already made sizable concessions and are searching for leverage to make their case.
Hopefully a bridge is built before more drastic measures are taken.