New NBA Luxury Tax – Poker or Smoker?

According to those in the know, one of the stumbling blocks to an agreement between the NBA and NBPA is the proposed revision to the “Luxury tax”.  Instead of teams paying $1 in tax for every $1 they spend above a certain threshold, it’s been proposed that the tax become more punitive.  The union wants the new tax to start at $1.25 for each $1 above the threshold and rise to as much as $1.75 depending on how much above the threshold a team had spent.  The owners want the new tax to start at $1.75 and rise to $2.75 based on criteria similar to the union’s.

As part of the Luxury tax overhaul, limits on the number of Bird’s rights players per team would be set, certain overspending would prevent signing a mid-level exception player, and the tax would triple for any team paying Luxury tax for three consecutive years.

The owners think that this will prevent teams from overspending.  The union thinks that this tax increase acts as a hard salary cap without an actual hard cap being imposed.  Both sides are right.  And both sides are wrong.

Thinking that higher taxes will prevent all owners from overspending assumes that all owners’ highest value is fiscal responsibility.  That’s just not the case and not the case all the time.  While owners are certainly not looking to waste money (well, most of them aren’t, anyway), they are wealthy men who, if armed with a good reason to spend to the highest levels of the proposed tax, would have the means to do so. 

If you were going to spend $50M on player salaries and, at best, make a brief playoff appearance and you thought that spending another $10M would put you into the NBA Finals, would you do it?  Many people would.  Many people wouldn’t.  Same with the owners.

There are many problems with the new proposal.  First, it doesn’t eliminate owners overspending; it just reduces the number of them who will do so on a regular basis.  For a small market team, it means that instead of having to deal with 8 or 9 bullies in the schoolyard, they only have to deal with 4 or 5.  That’s not going to eliminate getting beaten up nor make it any less painful.

Second, limiting how many Bird players a team has or keeping them from signing a mid-level exception player potentially messes up the “product” – the quality of the team that the organization can put on the floor.  I’m pretty much against anything that impacts the quality of the game.  An example of what can happen, but for a different reason, is when Minnesota lost draft picks because of the Joe Smith incident.  How much better would the quality of Timberwolves basketball have been over the past few years if the league had fined the owner more and left their draft picks alone?  My guess is “significantly better”.

The recently-expired deal highlights the need for more equal spending among the teams.  That agreement had the league spending 57% of the BRI or making a payment to the players to bring the season’s spending to 57%.  This past summer is the first time (or first time in a lot of years) that the players got an extra check because the league under spent.  The hole in how this is set up is that the league had to spend 57%.  Any individual team could spend significantly less than their share of that (57% / 30 teams).  Those owners who wanted to spend, spent.  And, until this past season, spent enough to make up for their more thrifty brethren.

When dramatically increasing cigarette taxes was first proposed, one of the “highlights” was that doing so would significantly reduce smoking.  How’s that working out?  If someone wants to smoke, they’ll smoke, regardless of how much they’re taxed.  Same thing with owners and spending.

What’s needed to level the playing field is more of a World Series of Poker (WSOP) approach.  It’s a $10K buy in to enter and everyone gets the same number of chips to start.  No matter how rich you are, you can’t buy more chips; it’s what you do with your chips that makes the difference.

Equalizing spending across teams is important.  I cover one way to do it in “Einstein and MacGyver Solve the NBA Lockout” (Part 1 and Part 2 – general concept & Max and Max+ players).  Matt Tolnick has presented some interesting ideas on the subject in a recent blog post on  Other good suggestions are floating around the blogosphere, as well. 

There are different ways to accomplish equal spending and, ultimately, parity and the final answer may be to incorporate a few of them together.  That final answer is probably not going to be found by making incorrect assumptions about how owners will behave with higher taxes and then basing the success of the negotiations on those incorrect assumptions. 

Since it’s not going to change things very much, there’s no sense in locking horns about it.  One side can give in to the other and maybe get a concession on some other point that actually impacts them.  That’ll speed up negotiations and makes it more likely that we’ll see the start of the NBA season sooner rather than later.


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