Luxury Tax - Past, Present and Future
by shrink on Dec 4, 2009 1:43 AM CST
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Before December 15th opens the door for many players on new teams to be traded, I wanted to take a minute to talk a little bit more about the luxury tax. With the rapid rise in the tax, we may see great value in Minnesota's financial flexibility both for this year and for the next. A more thorough review may help us understand some moves we may see from the Timberwolves front office.
This year there has been a dramatic increase in the size of the lux share over the previous four years. Let's take a look why:
Teams Over the Luxury Threshold on December 1, 2009
$2,887,947 Houston
$3,374,049 New Orleans
$3,947,172 Miami
$5,320,687 Denver
$5,622,091 Phoenix
$8,156,229 Washington
$9,981,689 San Antonio
$12,167,014 Orlando
$12,265,677 Utah
$12,651,917 Cleveland
$13,092,554 New York
$14,082,717 Boston
$17,891,715 Dallas
$21,421,066 LA Lakers
$142,862,524 total lux payments
$4,762,084 lux share
There have been three reasons for the big increase in the lux share.
1. The number of teams over the lux has greatly increased. In the the previous four seasons (since the latest CBA), the number of teams over the lux varied between 5 to 8 teams over. This year there is 14.
2. The size has also been an issue. The last four years, an average of 2.5 teams have been over $10 mil over the lux. This year it's nearly 8. Moreover, 41% of the previous years lux payments have come out of the Knicks pockets, as they have been far over the lux and the biggest payer for the previous four years. They have plenty of company at high payments now.
3. The U-turn in the rising lux has hit some teams hard. Many teams planned for the luxury threshold to simply keep increasing, and gave most players guaranteed raises.
2005-06 $61.700 lux threshold lux share $2.39
2006-07 $65.420 lux threshold lux share $1.85
2007-08 $67.865 lux threshold lux share $3.08
2008-09 $71.150 lux threshold lux share $2.91
2009-10 $69.920 lux threshold lux share $4.78*
If the lux threshold had risen comparably, say to $74 mil, the lux share would have remained about the same .. $2.95 mil from 11 teams.
What can we expect in the future?
First, expect the lottery threshold to drop, perhaps dramaticly. It won't be calculated until after the season is over and the money's been counted to determine the BRI, but some early estimates suggested the theshold may drop as low as $60 million. I think $63 mil is a realistic compromise, but compared to previous thresholds, we could certainly see some owners anxious to trade for cap space.
Second, some people expect major changes to the lux, or even another "one-time" Allan Houston provision. This 2005 provision allowed a team to waive a player, and be able to ignore his salary for lux calculations. I'm skeptical we'll see this again. A quick glance at the table shows that the majority of the money in the lux pool comes from the bigger market teams, and most are doing fine with revenues. The problem is that many smaller market teams that can't fill stands or sell much advertising are suffering. Another Houston provision would reduce the lux share for the poorer teams, and simply help the bigger teams improve their already sound revenues
Third, a radical overhaul of the luxury tax would damage the benefits it provides to all the concerned parties. Player's aren't stuck with a hard cap, so if there's an owner out there that's willing to pay, they can still get their contracts. Owners with very different levels of wealth all have a chance to win. They also have a mechanism to keep salaries in check, and can legitimately tell players "Sure, I love you and you're worth $6 mil, but I just can't afford to go over the lux and pay $11 mil. How about a deal starting at $4.5, and I'll add an extra year?" And finally, fans benefit because it creates parity. The richest owners don't dominate poorer ones. There are no Yankees/Royals in the NBA.
Finally, I think we may just see it tweaked, with a minor redistribution of the league's cut of the lux pool.
Currently, every team that is under the lux gets back 1/30th of the pool. Leftover money (from teams over the lux), goes to David Stern and the league office for operations. However, over time, you can see how that number has magnified.
2005-06 ... lux share $2.39 ... 6 teams over lux ... $14.34 for NBA expenses
2006-07 ... lux share $1.85 ... 5 teams over lux ... $9.25 for NBA expenses
2007-08 ... lux share $3.08 ... 8 teams over lux ... $24.64 for NBA expenses
2008-09 ... lux share $2.91 ... 7 teams over lux ... $20.37 for NBA expenses
2009-10 ... lux share $4.78 .. 14 teams over lux .. $66.92 for NBA expenses
Clearly the league office doesn't need $67 mil. I don't think they even need the $20 mil they had the previous two years, if their willingness to offer low/no interest loans to struggling NBA teams demonstrates anything.
I think we may see a minor change, where the league office takes their $10 mil out of the pool, and the rest of the money is divided up among teams under the lux. For example, this year the pool would be $133 mil, and divided not by 30, but by 16, making the lux share $8.34 mil. This higher number would provide additional benefit to small market teams that need the money, but it would have an even more important effect -- greatly increasing the incremental cost to go over the lux. This provides more reward for staying under the lux, and increases league parity.
Now things may change as the BRI (Basketball Related Income) numbers come in. Perhaps thre will be an unexpected upswing in revenues, or perhaps there will be teams that are hurting financially and seek new ownership. However, as it stands right now, the current luxury tax system is the Timberwolves friend. The tighter that other teams get squeezed financially, the greater the trade value of Minnesota's new-found financial flexibility.
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Interesting stuff Shrink
Clearly the league office doesn’t need $67 mil. I don’t think they even need the $20 mil they had the previous two years, if their willingness to offer low/no interest loans to struggling NBA teams demonstrates anything.
This is true, but the NBA also does pay veteran player minimum salaries, and I’m sure that share comes out of this pool as well.
Some of the remaining tax money gets distributed evenly in other ways, or can be invested. That money is useful for the league to have in their back pocket.
I agree that the Wolves flexibility in being under the tax can help them. But virtually every team over the tax (minus New Orleans) is over the tax because they’re competing for the championship. And, the biggest change in taxpayer’s is that the Lakers, not the Knicks, are the biggest tax payers. (The Lakers even sold their 1st round pick to the Knicks for 3 million.)
I don’t think there will be any big change with the luxury tax. I really don’t. If only because if offers teams under the tax line some financial relief directly.
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The Knicks are screwed
That’s basically what it comes down to. The declining cap has completely ruined Walsh’s master plan.
Knicks fans are convinced they can move Eddy Curry and Jared Jeffries, but the reality is that’s extremely unlikely to happen. Curry has played 9 games in two years. Jeffries can’t average even 5ppg in 20 minutes. Even if the Knicks were to try and package one with David Lee or Nate Robinson (who’s so out of control not that D’Antoni won’t play him at all), no team is going to give up $14 million plus in assets for them.
Without the ability to sign two max free agents, the Knicks probably won’t be able to sign even one. LeBron, Wade and Bosh all know what it’s like to be a solo act…it’s not fun.
Knicks Plight
I’ve looked a lot at the Knicks, and you’re right, they are in some pretty bad shape. And their way out may be something the Wolves fans would love if they’d emulate.
The Knicks hope that the bright lights of NYC will attract big name free agents who want to be on a national stage. However, NYK is a very bad team, currently at 4-15. Imagine you’re Chris Bosh and NYK offers you a max deal. If you accept, that summer you will be hailed as a savior and be the toast of the town. However, nobody is good enough to turn this team into a contender, and soon the NYC media will be treating you as a national disgrace.
However, if the Knicks could theoretically create enough cap space for two elite free agents, it’d be a completely different story. They could tell Bosh “If you sign, Dwayne Wade said he’d sign too” and tell Wade the the same thing. Together they would have the chance to turn the team around, and they’d both get all the benefits of doing so in the biggest city in the world.
(Tuck that idea away for Minnesota, with two sign-and-trades. We actually have more assets to outbid other teams in S&T deals. Pretty exciting, eh?)
Meanwhile, how could the Knicks clear the space to do so. Larry Coon recently wrote for the NY Daily News that assuming a salary cap around $53 mil, moving Jeffries for expirings is not enough .. they need to move Curry. The Knicks can’t trade their 1st (Utah owns it, unprotected), and they have few assets with that kind of trade value. They would probably be forced to trade Gallinari, the Knicks fans greatest source for hope – or use him in a S&T next season.
Their only other option is to trade both Curry and Jeffries two year deals for a package of expirings, and smaller bad contracts that last three or more years. For example, imagine that the Knicks trades their $20 mil for a package with $10 mil in expirings, and $10 mil of deals with 3-4 years left on them. New York gets the cap space it needs right now by taking on worse longer term debt.
Still, even these approaches are longshots because their team is just so bad. Do they believe their city really can attract two elite free agents? Is it worth gambling their most popular player, or taking on Isiah-like longterm debt, just to have the chance? And of course, Knicks fans and media are a lot less forgiving than Minnesota if they get it wrong. I agree they are in a really bad place.
They really should be by all rights
I do understand the nature of the cap dilemma Walsh faced coming in, and of course they’re still about to give up a very high pick to Utah in the last of Isiah’s direct depredations of their roster.
But the karma of sticking your franchise in a complete holding pattern for two-plus years without ever even trying to do anything but ride out the contracts…. That is wrong. They really should not wind up with LeBron or whoever as their reward for that.
I’m actually sympathetic to their fan base; the seeming arrogance of their assumptions about how everyone wants to play in MSG is simple desperation. But the organization, I suspect, is going to need to swallow hard for another couple of years.
"It has come to the editor’s attention that the Herald-Leader neglected to cover the civil rights movement. We regret the omission."
This might be overly optimistic
A radical restructuring of the luxury tax system such as the one you’re suggesting could take place would be an unfair advantage to the teams with cap space. Sure, it would be nice for us, but it would screw over the teams with a lot of players signed long term.
Players’ value as a percentage of a team’s total payroll wouldn’t change, but that total payroll would. A team like Miami could cut every contract on its roster and sign a bunch of players on value deals relative to the new cap and tax levels. All those players would have far greater value than the players on teams signed to ‘old scale’ deals. The pendulum will have swung too far in the other direction.
Is this radical?
1. The lux tax payers are still paying exactly the same amount. The net shift is to redistribute money from the league office to the teams under the lux. Pookeyguru pointed out that the league office spends money (I agree), but they don’t need $67 mil — I estimated $10 mil would pay all their expenses. Isn’t it better to put that money in the hands of the other owners?
2. Obviously there is only an imbalance short-term, because teams will readjust. However, I think this year’s change with a falling lux and a huge lux pot is an even bigger imbalance. Moreover, in 2010 there is a huge amount of money coming off the books for many teams, so it will allow teams to re-adjust more quickly.
3. Let’s see if this new tweak in the lux system would have a radical longterm effect by seeing how it would have changed the numbers in previous years.
2005-06 ($71.6 lux pot – $10 League expenses) / 24 teams = $2.57 lux share .. actual $2.39
2006-07 ($55.5 lux pot – $10 League expenses) / 25 teams = $1.82 lux share .. actual $1.85
2007-08 ($92.4 lux pot – $10 League expenses) / 22 teams = $3.75 lux share .. actual $3.08
2008-09 ($87.3 lux pot – $10 League expenses) / 23 teams = $3.36 lux share .. actual $2.91
2009-10 ($142.8 lux pot – $10 League expenses) / 16 teams = $8.34 lux share .. actual $4.76*
Now I understand that this may bit of a false analogy, because teams may have operated differently if the rules were different. However, I think the initial mathematical system was put in place with the league office expecting about $10 mil. The tweak reduces the leagues uncertainty, and improves the function of the lux .. league parity. Also you can see that under normal circumstances – the data available when the CBA was written – the eventual number is the same. Its the overspending of the league on newer contracts that’s causing the deviation (and the drop in revenues) and this puts this number back in line with its historic value.
4. I agree that for the next year or two, more fiscally responsible deals will have more trade value. In a declining NBA economy, they would anyway, but the higher lux share initally would give them a boost in trade value. However, I think that moving the money out of the hands of the league office and into the teams that need it is worth it, while maintaining the parity the lux provides.
Interesting to see whether this falling threshold
delivers a change in the structure of contracts, either through consensus practice or through the CBA.
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What will Statistics professors do?....
Without the Knicks’ salary number to use as an example of an “outlier”? Donnie Walsh has a lot to answer for. The previous regime there has given us so much cap lore…. The “Allan Houston” provision that didn’t even eventually result in Houston himself being waived…. It’s a rich, rich tapestry. Walsh comes along, and all we get is a starved team on the court for a couple of seasons. (Eddy Curry notwithstanding.)
I didn’t realize the league office was getting all that extra coin. Probably explains the fact that they finally updated their calendar app on the Web site, which up to last year was cruder than most cobbled-up javascript by beginning Web developers.
"It has come to the editor’s attention that the Herald-Leader neglected to cover the civil rights movement. We regret the omission."
awesome..
…it will be very interesting to see what the BRI turns out to be and if the cap takes a nose dive.
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I don't see the "Allan Houston" provision happening again
Ultimately, most owners didn’t really take advantage. All it did was help the teams over the luxury tax. Teams over the luxury tax increase salaries for all teams, the other owners are not going to do them another favor knowing it will lead to higher payrolls for all teams.
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