Can someone please explain the luxury tax?!?!

Here are a couple of articles on the subject:

http://sportsillustrated.cnn.com/inside_game/marty_burns/news/2001/07/18/burns_insider/

http://www.alleyoop.com/ftb/120701.htm

 

It's the term used when desribing the impact taxes have on NBA players. Absolutely nonexistant, because they live in the lap of luxury.

 

AntiSonic,

A team that is over the Luxury tax cap (assuming there is one) has to pay a dollar for dollar penalty into a pool, that is divided up by the teams that aren't over the cap. So, in actuality, the teams over the luxury tax cap get hit twice. They have to pay into the pool & they miss out on the money from the pool being divided up. The players also get hit hard by the Luxury tax. Here's a link that'll explain it better than I can.

http://members.cox.net/lmcoon/salarycap.htm#15

15. What is the "luxury tax?" Why does it exist? How is it determined? Who pays it?
As detailed in question number 14, the escrow system helps to ensure that total salaries do not exceed a designated percentage of BRI. If the players are paid more than the designated percentage, then part of their salary (not to exceed 10%) is returned to the owners. However, if the players are paid so much that the escrow withholding fails to lower the league-wide salaries to the designated percentage, then some teams pay a tax. This is often referred to as a "luxury tax," but the CBA simply calls it a "tax" or a "team payment."

The tax is triggered when the league-wide salaries and benefits exceed the designated percentage of BRI by more than 10% of the league-wide salaries and benefits. If the tax is triggered, then it is paid by all teams that are over the team escrow limit, in the amount by which their team salary exceeds the team escrow limit (see below). If the tax is not triggered, then no team pays any tax, no matter how high their payroll.

Here is an example similar to the one provided in question 14. In this example, the tax is triggered.
Season: 01-02
BRI: $2.614 billion
Designated percentage: $1.438 billion (55% of $2.614 billion)
Actual salaries: $1.631 billion ($4.5 million average salary)
Benefits: $80 million (estimated)
Held in escrow: $163.1 million (10% of players' salaries)
Overage: $273 million (amount salaries & benefits are over the designated pecentage)


In this example, the overage was $273 million. The CBA says the tax is triggered if the overage exceeds 10% of the total salaries and benefits. In this example, the total salaries and benefts were $1.711 billion. Ten percent of this is $171.1 million, and the overage did exceed this amount. So in this example, the tax is triggered. The entire escrow withholding is returned to the teams (the players never pay more than 10% of their salaries) and the high-spending teams pay a tax. The idea is that since the high-spending teams are the ones most responsible for the players' salaries being so high, they should be the ones making up the difference.

How much does each team pay? A dollar amount, called the "Team Escrow Limit" is calculated. Teams with payrolls (based on the players on their roster on the last day of the regular season) over the Team Escrow Limit pay a tax equal to the amount they are over. So if the Team Escrow Limit is $55 million, then a team with a $60 million salary pays a tax of $5 million. Teams with salaries below the Team Escrow Limit do not pay any tax.

The Team Escrow Limit is calculated by dividing the designated percentage of BRI by 0.9, adjusting for benefits, and dividing the result by 29 (the number of teams in the NBA). So if BRI is $2.614 billion, the designated percentage is 55% and benefits total $80 million, then the Team Escrow Limit is $52.326 million.

One important thing to note is that no team, no matter how high their payroll, pays any tax unless the tax is triggered. Here is another example, this time with 28 teams exercising fiscal restraint, and one team spending without regard:
Season: 01-02
BRI: $2.614 billion
Designated percentage: $1.438 billion (55% of $2.614 billion)
Total salaries: $1.466 billion (28 teams with payrolls of $47 million each, and one team with
a payroll of $150 million)
Held in escrow: $146.6 million (10% of players' salaries)
Benefits: $80 million
Total salaries & benefits: $1.546 billion
Overage: $108 million (amount total salaries & benefits exceeds designated percentage)


In this example, the total salaries and benefits were in excess of the designated percentage by $108 million. However, the overage was not enough to trigger the tax, so no team, not even the one with the $150 million payroll, pays any tax. Note that since there was an overage of $108 million, this amount is returned to the NBA from the escrow account, and the players receive the $38.6 million that remains.

Where does the luxury tax money go? The CBA says that this money is the exclusive property of the NBA, and that the distribution of this money is at the NBA's sole discretion.

There was also a desire among some of the owners to exclude contracts that existed prior to the signing of the CBA (contracts from 97-98 and earlier) from the computation of the team tax. The owners decided that all contracts would apply, no matter when they were signed.

 

Okay, nevermind. I guess my definition was incorrect.

 

okay I'm going to try and tackle this one Anti, in sorta laments terms.

No, owners can not just circumvent the salary cap by paying a luxury tax.

There is only two ways they can go above the luxury tax:

1. Exceptions, like the 4.5 mill exceptions dolled out to teams over the cap every year to sign role-players. Not stars, but some steals can be had, like how the Rocks got Shandon and Mo for less than they were deemed worth at the time.

2. Resigning your own players that you have Bird Rights to for higher contracts. You get Bird Rights for players when you've had them under contract for 3 years OR if you got the player in a trade for a team that had him for 3 years. For example, when Stevie's contract runs out, the Rocks wont have that much cap space, but they can go over the cap and sign him to the max because they have his bird rights.

And there aren't too many teams that have gone too far over the cap. Right now, the worst offenders are NY, and Portland by far, around double the amount of the salary cap. Dallas will be close to their level soon though. Sacramento is somewhere up ther too. Most other teams will are close to the salary cap or will be soon with expiring contracts.

Going over the salary cap by huge a huge amount is a risky propostion though. If you overpay players who turn out to be not worth it, it is damn hard to move those players unless the contracts are close to expiring. And even then, teams don't want the players, they want the expiring contracts, just to free up cap space. Look at NY. They are stuck in mediocrity now unless they get a huge stud in the draft. The only guys of any value are Spree, Camby, and Othella. Everyone else makes WAAAY too much money for role players. So by overspending on bad players, they are stuck being a pretty bad team for awhile, despite having as much money as they do to spend on whomever.

The luxury tax, eh, I'm not too familiar with the technicalities of it, but I assume it kicks in when you are a certain amount of money over the cap(like say, 5 mill or 10 mill). After that a team has to pay dollar for dollar the amount they are over the cap and it is distributed in some way(???).

Believe it or not, a lot of teams ARE scared of the tax, and are making moves and trimming salaries so that they don't have to pay it. Teams don't even want to use their exceptions because they simply don't want to pay the tax. The only teams that don't care about the tax so much are teams that:

1. have owners that really don't care about money at all

2. Have a legit shot at the title and are willing to overpay for a little while for that to extend their chances of winning the trophy.


Anyway, hope it helped. I actually think the NBA is pretty good in how they balance out money and talent. Not quite as good as the NFL, but a hella lot better than MLB.