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Yes, you do pay luxury tax on salary paid to waived players.
If you waive a player with a guaranteed contract, you still have to pay that player his money (obviously, it's guaranteed) unless another team picks him up. However, do you pay lux tax on that salary (assuming your team is over the limit)?
For example, your team payroll is $89 million, the lux tax limit is $71 million. Your team is paying an extra $ 18 million in lux tax. You waive player X who is making $5 million. Your payroll is still $89 million (you still have to pay the contract), but does your lux tax payment drop to $13 million?
Yes, you do pay luxury tax on salary paid to waived players.
How did we end up with Finley then?
he was an "exception"
He was part of the whole "amnesty clause". That was just a one-time deal.
The 2005 CBA established rules for the luxury tax. Each team was allowed to waive one player. The salary of that player would count towards the salary cap, but not the luxury tax. The Mavs waived Finley and he became a FA.
http://members.cox.net/lmcoon/salarycap.htm#Q18
If you mean originally:
18. What is the luxury tax amnesty provision?
This was a one-time opportunity for teams to waive one player and avoid having that player count in the team's luxury tax computation. Teams had the opportunity to use this provision between August 2nd and 15th, 2005 (right after the CBA went into effect). It could be used only for players signed or acquired prior to June 21, 2005, or for players already waived when the current CBA went into effect. A team could waive only one player using this provision.
Players waived using this provision are not counted in the team's team salary (see question number 14) when computing the amount of luxury tax the team owes (see question number 16). For example, if a team waived a player with a $10 million salary, and ended up $15 million over the tax level, then they would only owe $5 million in luxury tax (saving $10 million). However, the tax savings does not necessarily equal the player's salary -- if the team ended up just $3 million over the tax level then they would only save $3 million (owing no tax at all). If they ended up below the tax level, then there is no tax to be paid so they wouldn't realize any savings at all. On the other hand, it's possible for the net savings to exceed the player's salary. If a team's amnesty cut takes them from above the tax level to below it, then in addition to not owing any tax they will also receive a tax distribution.
The amnesty provision only affects the team's tax obligation. The team must continue to pay the player, his salary continues to count against their salary cap, and all other salary calculations are unaffected. However, the team may not re-sign or re-acquire the player for the length of the terminated contract. In all other respects, the player is treated just like any other waived player (see question number 54 for more information on waivers).
Although the amnesty provision was informally referred to as the "Allan Houston provision," the Knicks chose not to use it on Houston. The actual list of players on whom the amnesty provision was used is (* = players who were previously waived): Derek Anderson (Blazers), Vin Baker* (Celtics), Troy Bell* (Grizzlies), Calvin Booth (Bucks), Doug Christie (Magic), Derrick Coleman* (Pistons), Howard Eisley* (Suns), Michael Finley (Mavericks), Brian Grant (Lakers), Fred Hoiberg (Timberwolves), Aaron McKie (76ers), Ron Mercer (Nets), Reggie Miller* (Pacers), Alonzo Mourning* (Raptors), Wesley Person* (Heat), Eddie Robinson* (Bulls), Clarence Weatherspoon (Rockets), Jerome Williams (Knicks). The Bobcats, Cavs, Clippers, Hawks, Hornets, Jazz, Kings, Nuggets, Sonics, Spurs, Warriors and Wizards did not utilize this provision.
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