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Lest You Think Luxury Tax
2002-07-17 10:27
by Mike Carminati

Lest You Think Luxury Tax Will Resolve Competitive Imbalance

The NBA announced today that because total team salaries did not exceed is self-imposed threshold of 61.1% of basketball related income (BRI), half of the salary deductions made during the past year totaling $153 million will be returned to the players. For example, Kevin Garnett, the highest paid player, will get back about $1.12 million, 5% of his total salary. Salaries only totaled 60.2% of BRI. Also, because the self-imposed threshold was not met, no teams will have to pay a luxury tax. On the surface everything seems rosy, right?

Well, half the teams are expected to incur the luxury tax next year (expected at about $50 million). Some owners are already clamoring to get rid of the luxury tax in exchange for an extension of the Collective Bargaining Agreement.

The thinking is that the tax wouldn't stop teams from spending and would continue to create an imbalance between teams in the East and West, which has more teams that are willing to pay the tax.

Also, the salary cap in the NBA dropped by a reported 5.24% "directly attributable to the more than $100 million drop in revenues expected from the first year of the new television deal with ABC/ESPN and Turner." This is one year after the second highest percentage jump in salary cap (19.72%) since its creation in 1984-85 (44.65% in 1995-96 is the highest). The salary cap has never before gone down. The average increase prior to this year was 13.18% and the lowest one-year increase was 4.41 in 2000-01.

I am left with a whole lot of questions. First, re. the escrow account, the players received $77 million slightly more than half of the $153 million. What happened to the interest? The money was in escrow, but there must be some sort of interest on it. I know that interest rates are low, but they must have made something. Where did it go? Apparently not in the players' pockets, but this is a niggling point.

Second, it seems highly suspicious that the BRI, and therefore, the salary cap, fell. Why would the teams be investing so heavily a year ago if such a large drop in their revenues was imminent? Also, how did the owners curb themselves so quickly to stay under the cap this year? It could just be a anomolous blip on the radar screen, but it seems odd.

More importantly, if the luxury tax is such an important tool in competitive balance, why would so many teams be willing to pay it, and why would some owners be willing to drop it in favor of an extension to the current CBA? What happens to the competitive balance?

The total salary is almost one percent under the threshold, and yet the players are still losing 5% of their salaries (approx. $76 million). That seems usurial.

Also, with regards to the current baseball situation, basketball players with a weakened union receive approximately 60% of the total revenue. Baseball players received approximately 55% (by the owners numbers), and the owners cry poverty. The baseball owners express an interest to emulate the NBA and NFL systems. But as Bob Dupuy states in his interview with Baseball America, the owners will not offer, let alone demand, a salary cap. If the luxury tax is what piques the baseball owners' interest, why is the NBA so ready to slough it off?

. . .

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