CBA Roundtable: The Luxury Tax

May 3, 2013; Houston, TX, USA; Oklahoma City Thunder small forward Kevin Durant (35) hugs former teammate and luxury tax casualty James Harden (13) after game six of the first round of the 2013 NBA Playoffs. Mandatory Credit: Troy Taormina-USA TODAY Sports

 

The luxury tax has changed the dynamics of the NBA by both creating a disincentive for franchises who would push the limits of a soft-capped league while also establishing a reward for more thrifty teams since teams under the tax line secure a portion of the sum paid by teams in the tax.

What do you think of the current luxury tax system and what if anything would you do to change it?

 

Leo Sepkowitz (@LeoSepkowitz):

One of the few things that the last CBA did well was adjusting the luxury tax system. Harsher penalties were introduced and indeed owners are now concerned with ducking the new repeater tax. This offseason saw the big-market-bully Knicks slice a few million bucks off their payroll even though they were too far over the salary cap to stick their nose into free agency. The repeater tax is intimidating and the system is working. That does not mean it is perfect.

As constituted, teams can avoid the pricey hammer by staying under the tax line every few years. That is a decent rule and should keep powerhouses shuffling to shed salary once in a while. However, it also means a team that maintained clean books before a major offseason could play three seasons with a bloated payroll before paying the repeater tax. In the fourth year, it could shed payroll or, if it all lines up just right, naturally go under the tax as contracts expire to avoid paying repeater taxes a second time. Remember that players rarely get deals longer than four years per the new CBA, so the idea of a team being forced to pay repeater tax for many years in a row may never happen.

Hitting teams with repeater taxes sooner—say, after two consecutive seasons of being over the tax line—would go a long way toward slowing down some of the league’s most deep-pocketed owners.

 

Jared Dubin (@JADubin5):

My idea is pretty complicated. It involves sliding tax brackets and teams can move up or down based on whether or not they are taxpayers, every year.

The initial tax bracket would start as it does now, via Larry Coon’s CBAFAQ:

If a team pays the tax for a second consecutive year, I’d tack $0.25 per dollar onto each of those numbers. If they pay a third year, you do it again. And again, and again, and again, for as many consecutive years as they pay the tax. So year two would be $1.75 per dollar on the first $5 million, $2.00 per dollar on the next $5 million, $2.75, $3.50, $4.00, etc. Year three would be $2.00 per dollar on the first $5 million, then $2.25, $3.00, $3.75, $4.25, etc.

Here is the twist: if a team goes under the tax line for a year, rather than moving all the way down to the initial bracket, they just move down one bracket for each year that are not taxpayers, just like teams move up one bracket for each year they pay the tax. So it would take a team that pays the luxury tax three consecutive years, two years to get back to the first bracket. It would take a team that pays for five straight years four years to get back down to the initial bracket.

Let’s work through an example so you’re not insanely confused. The Knicks have been taxpayers for the last three seasons and will be again next season. That’s four. Assuming they are not taxpayers in 2015-16 after using cap space next summer we will credit them with one season as a non-taxpayer. That would move them down to the third tax bracket if they then go over the tax the following year, so they would start at $2.00 per dollar on the first $5 million, then $2.25, $3.00, $3.75, $4.25, etc.

It makes sense in my head, but probably doesn’t on paper. Whatever. It’s better than what we have now, which doesn’t actually discourage teams from spending so long as they take a year every four where they don’t spend.

 

Leo Sepkowitz (@LeoSepkowitz):

Makes full sense on paper. Really love that idea.

 

Mark Evans (@JRMarkyMark):

The idea of the luxury tax is all well and good in my head. Last season, the Nets, Knicks, Lakers, Heat, and Clippers were the five to pay the tax. Miami was significantly past the threshold but the Clippers were barely over. The Knicks and Lakers were jokes last year and the Nets were never serious competitors. After thinking about who actually paid the tax this year, I wondered if we could even afford to go a bit softer on teams that choose to spend money.

I dismissed this idea internally pretty quickly because I think the threat is an important disincentive to cheap owners of contenders like the Chicago Bulls and Oklahoma City Thunder. Then again…maybe more lenient luxury tax rules push OKC to offer Harden a bigger deal, in which case I think he stays. Sure, the NBA loses a contender in Houston but I think the NBA is a lot more fun with KD/Russ/Harden/Ibaka on the same team for the foreseeable future.

Nothing is perfect but I actually kind of like the current tax system. I think owners should be able to spend a little without having to pay ridiculous amounts of luxury tax. For example, I do not have much of a problem if a team like the Clippers hovers $1 or $2 million over the tax threshold for a few years while they compete for a ring. Under the current rules, they may not want to do this when the repeater tax starts to come into play.

I am not even sure a team like the Nets needs to be punished as severely as they will be under the current system. In reality, the only way you are going to go that far over the cap is to trade for a bunch of hilariously overpriced mismatched players. It would not make a serious contender and I do not think an owner should be punished so hard by the tax for at least trying to make something happen.

My conclusion: I have been thinking about this forever, I am conflicted, and I do not know exactly what changes I would like to see. I suppose I would raise the upper limit in the first taxpayer bracket a bit, which is currently set at $4,999,999, and I’d also lower the tax rate in that bracket, which is currently at $1.50. Basically, I guess I just want to go softer on the owners that are willing to go a bit over the threshold to compete.

 

Daniel Leroux (@DannyLeroux):

The sentiment Mark worked through at the beginning of his thoughts were remarkably similar to my own process. The league missed out on a potential dynasty in Oklahoma City because ownership was unwilling to make frequent stints in the luxury tax part of their future. In fact, as it turned out they largely could have avoided it since the salary cap has gone up quickly enough to mostly outpace their salary increases.

I ended up turning largely away from that because the new TV deal should dramatically change the economics of teams as a gigantic revenue increase that players only get half of. That means if teams largely keep their operating costs stable they will be making a ton more money. I fully expect fans to respond vigorously if teams like Chicago and OKC continue their penny-pinching ways when the bottom line looks that much better.

That said, a system that penalizes teams that just take a dip in the luxury tax pool makes sense to me. It would help league quality by taking some of the sting out of those smallest decisions that have big consequences and the hard cap is a sufficient deterrent for some teams as well.

I would like to see a system that combines the core spirit of both Jared and Mark’s respective systems. Jared’s concept of sliding scales makes perfect sense and properly penalizes teams who live in the tax for an extended period while Mark’s tweak at the bottom end helps keep Jared’s in line.

The combination would look like this: The first two tiers of the current table split into three: the first from $0 to the apron at $4 million, the second from $4,000,001 to $6,499,999 and the final from $6,500,000 to $9,999,999. Teams that land above the tax but below the apron pay $1.25 per dollar but any seasons in only that tier neither count towards the repeater tax nor re-set the repeater clock. From there, everything works as Jared laid it out with teams moving up and down based on how they spent in previous years.

 

Thank you so much to the roundtable participants and readers alike If you would like to continue the conversation, feel free to write a comment, send us an e-mail at midlevelexceptional@gmail.com or reach out on Twitter.

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