Wednesday, October 12, 2011
The tax proposal the players hate
By Henry Abbott
Zach Lowe of Sports Illustrated shares details of the NBA's proposed stiff luxury tax, which is one of the key "systems issues" that broke apart talks on Monday. He writes:
- The tax would start at $1.75 in penalty payments for every dollar a team is over the tax threshold. Say goodbye to the dollar-for-dollar hit, which was the maximum penalty a team could pay under the old system.
- That $1.75-to-1 ratio would last for the first $5 million a team is over the tax line. For every $5 million increment after that, the penalty would jump by 50 cents per dollar. So, for spending over the threshold between $5 million and $10 million, the penalty would be $2.25-to-1. For spending between $10 million and $15 million, it would be $2.75-to-1. And so on.
- The tax threshold would begin near where it did last season, when the salary cap was $58 million and teams crossed into luxury-tax territory at the $70 million mark.
Probably no coincidence, that level of luxury tax would cost the Lakers about $50 million a year (at last year's salary rates). That's about the amount the league is hoping the Lakers will pay in revenue sharing, and luxury tax is a real way to transfer money from rich teams to poor.
Lowe also adds another key note:
If a team has gotten into tax territory, say, twice over the preceding four seasons and finds itself over the tax line a third time, the penalty triples in each spending range. In other words, that $1.75-to-1 ratio that kicks off the tax in Year 1 would jump to $5.25-to-1 for a team paying the tax a third time.
Billy Hunter and Derek Fisher are adamant that such a tax would function just like a hard cap, in that it would create a point beyond which no owner would spend.
There's a reason players are open to milder luxury tax, however: It's a way for James Dolan and Jerry Buss to pay more than their fair share of player salaries. Luxury tax is a way to, in effect, get Jim Dolan's Knicks to pay for Michael Heisley's Grizzlies to sign players. A little bit of that brand of revenue sharing could make a better market for players.
I asked a union official how they know where that player-friendly effect stops, and where the de facto hard cap kicks in.
His answer was that their economist Kevin Murphy had the task of predicting how owners would spend under the last CBA, back when it was new. Looking back, they realize his work was, the official says, "pretty much perfect."
Maybe this should not be a surprise. Murphy is not just a MacArthur "genius" grant recipient. He's also the man Freakonomics calls, essentially, the smartest person in the world.
This time around, the players are trusting that Murphy can repeat the trick of predicting how NBA owners will spend. When his work shows a tax is high enough to deter all spending, they consider that a hard cap.
So as the league comes up with a tax they say is not really a hard cap, they don't just have to convince players. They also have to convince that genius.