GSH
07-18-2007, 10:57 AM
I think a lot of people don't understand what happens with the luxury tax, especially to teams at the threshold. (Some of them might even admit it.) Sorry to make another thread, but I thought a few people might actually like to see it spelled out. Here are a couple of paragraphs that I lifted from http://members.cox.net/lmcoon/salarycap.htm#16 (http://). Maybe it will make more sense:
Since the previous CBA required teams to project league revenues a year in advance when making their roster decisions, a "cliff smoothing" provision was set up to provide teams a margin of error. Under this provision, for the first few million dollars above the tax level, distributions were phased-out (i.e., teams didn't "fall off a cliff" and lose their distribution for barely exceeding the tax level). Now that the tax level is set in advance, and teams know the tax level before they begin signing contracts, this margin of error is no longer required and so the cliff provision was eliminated. Now there effectively will be a hit (about $1.9 million in 2006-07) as soon as a team crosses the tax level.
To understand the consequence, consider two teams that suffer injuries during the 2005-06 season, each needing to sign a replacement player. Team A is $500,000 above the tax level, and Team B is $500,000 below the tax level. For this example we'll assume the players sign for $719,373 (the minimum salary for a player with two years of service in 2005-06), and the tax distribution for the non-taxpaying teams is $2.4 million. To sign their player, Team A must pay $719,373 in salary and $719,373 in additional tax, for a total of $1,438,746. Team B, on the other hand, now becomes a taxpayer. They pay the same $719,373 in salary plus $219,373 in tax (remember, they were previously $500,000 below the tax level), and they also forfeit their $2.4 million tax distribution, so the total cost to them is $3,338,746. So for Team B, the tax penalty isn't 100%; it's more than 250%. They can't even sign a cheaper player -- for tax purposes, players with fewer than two years of service are taxed at the two-year minimum amount.
It's worth noting that a team $1M under the threshold would pay $719K for the player, a team $500K over the threshold would pay $1.438M, and a team $500K under the threshold would pay $3.33M.
It's bad enough paying $6 Mil for a $3 Mil player (when teams under the threshold are getting $6 M players for $6 M.) But paying a premium for a player who isn't an absolute perfect fit? That's a disaster. When a team that is into the tax pays out $6 M per season for a player, it's hard to remember that he is really only getting $3 M of it. There is a reason why the player could only command a $3M salary, but he has to live up to $6M expectations. He better be one hell of an over-achiever.
People talk about "surrounding Tim Duncan with the best talent", and ignoring the luxury tax. Why not pick up guys like Zach Randolph or Rasheed Wallace? They have a lot of individual talent. What about guys like Steve Francis or Tracy McGrady? Does anyone think that those guys would fit well on the Spurs roster? Any player, any deal, has to be looked at in the context of the current squad, salary, and plans for the future. The luxury tax adds a hell of a lot of context.
Since the previous CBA required teams to project league revenues a year in advance when making their roster decisions, a "cliff smoothing" provision was set up to provide teams a margin of error. Under this provision, for the first few million dollars above the tax level, distributions were phased-out (i.e., teams didn't "fall off a cliff" and lose their distribution for barely exceeding the tax level). Now that the tax level is set in advance, and teams know the tax level before they begin signing contracts, this margin of error is no longer required and so the cliff provision was eliminated. Now there effectively will be a hit (about $1.9 million in 2006-07) as soon as a team crosses the tax level.
To understand the consequence, consider two teams that suffer injuries during the 2005-06 season, each needing to sign a replacement player. Team A is $500,000 above the tax level, and Team B is $500,000 below the tax level. For this example we'll assume the players sign for $719,373 (the minimum salary for a player with two years of service in 2005-06), and the tax distribution for the non-taxpaying teams is $2.4 million. To sign their player, Team A must pay $719,373 in salary and $719,373 in additional tax, for a total of $1,438,746. Team B, on the other hand, now becomes a taxpayer. They pay the same $719,373 in salary plus $219,373 in tax (remember, they were previously $500,000 below the tax level), and they also forfeit their $2.4 million tax distribution, so the total cost to them is $3,338,746. So for Team B, the tax penalty isn't 100%; it's more than 250%. They can't even sign a cheaper player -- for tax purposes, players with fewer than two years of service are taxed at the two-year minimum amount.
It's worth noting that a team $1M under the threshold would pay $719K for the player, a team $500K over the threshold would pay $1.438M, and a team $500K under the threshold would pay $3.33M.
It's bad enough paying $6 Mil for a $3 Mil player (when teams under the threshold are getting $6 M players for $6 M.) But paying a premium for a player who isn't an absolute perfect fit? That's a disaster. When a team that is into the tax pays out $6 M per season for a player, it's hard to remember that he is really only getting $3 M of it. There is a reason why the player could only command a $3M salary, but he has to live up to $6M expectations. He better be one hell of an over-achiever.
People talk about "surrounding Tim Duncan with the best talent", and ignoring the luxury tax. Why not pick up guys like Zach Randolph or Rasheed Wallace? They have a lot of individual talent. What about guys like Steve Francis or Tracy McGrady? Does anyone think that those guys would fit well on the Spurs roster? Any player, any deal, has to be looked at in the context of the current squad, salary, and plans for the future. The luxury tax adds a hell of a lot of context.