Proposing a Solution for NBA's Ineffective Luxury Tax

In the course of the collective bargaining that killed nearly half of the 1998-99 season, the NBA got what seemed to be a major concession from the players' union: a little something we call the luxury tax. The mechanism forces teams with a payroll over a certain threshold to pay a dollar-for-dollar tax for every cent said team is above the threshold to be distributed to teams under the tax level. It was meant to provide a bit of revenue sharing for a league short on it, but more important to restrain player salaries by making the penalty for high payrolls painful.

How has that worked out? Since 2001, NBA revenue has increased 35 percent, from $2.7 billion to $3.6 billion. Salaries? They have increase 42 percent, from $1.6 billion to nearly $2.3 billion. Salary growth has outpaced revenue growth by some $110 million over the decade, in spite of the the luxury tax.

Clearly, despite the myriad deadline-day trades in which teams try to sneak under the tax threshold by moving around players on the fringe, the luxury tax has not worked. But it can, with one big ol' tweak. Introducing ... the graduating super tax.

Earlier this season, Utah sent Matt Harpring and Eric Maynor to Oklahoma City for the rights to an aging German player even Germany has no use for (!) Why'd the Jazz do it? Because losing Harpring's contract saved the team $10-14 million when the luxury tax is accounted for. Maynor, a prized rookie, was the price. Why'd the Jazz have to do it? Because Carlos Boozer didn't opt out of his contract, and following that the Jazz decided to match Portland's 4-year, $32 million offer sheet to Paul Millsap. Did the luxury tax restrict Utah's willingness to pay a back-up power forward $32 million? No! It forced Utah to skedaddle away one of its most cost-effective players.

And that's the problem with the tax as presently constructed: for most teams, it's more of an inconvenience than a deterrent. Sure, non-playoff teams tend to avoid the tax like a plague. But many of these teams, especially the worst, are generally concerned with cutting salary in general -- the tax just happens to be a nice line in the sand, especially for cost-conscious owners. If the luxury tax were effective, the Jazz probably wouldn't have matched Portland's Millsap offer. That would have prevented Portland from handing its cap space to Andre Miller, which would have likely shrunken Miller's eventual salary. Ergo, if the luxury tax were a real deterrant, salaries might actually have been kept in (relative) check this summer.

One other example of how ineffective the luxury tax has become: this season, more teams than ever are on track to exceed the threshold. At season's start, 14 of 30 teams sat above the threshold of $69.9 million. Nearly half the league! New Orleans seems set to sneak under, as do the Jazz and perhaps the Wizards (depending on whether Gilbert Arenas comes back this year). Still, for all the teams well into tax range -- there are seven teams on track to pay more than $10 million in tax -- this system clearly hasn't deterred big payrolls.

So how do you fix it in such a way that high payrolls -- and by extension oversized contracts -- will naturally shrink? I endorse the idea of a super luxury tax built on a graduating scale.

Currently, the salary cap is set at 51 percent of the league's average basketball-related income. The luxury tax threshold is set at 61 percent of income -- and as such is effectively 120 percent of the salary cap. Right now, every team exceeding the threshold pays a 100 percent tax on all payroll over the threshold, as explained above.

Now what if you add additional levels with higher tax rates? Allow teams over the threshold but within 130 percent of the salary cap to pay the current dollar-for-dollar tax. But for teams exceeding 130 percent of the cap, charge a 200 percent tax -- two dollars in tax for every dollar over the new second step threshold. Above 140 percent of the cap, charge a 300 percent tax. Above 150 percent of the cap -- that'd be a payroll in excess of $86.55 million -- you pay a 500 percent tax rate. That will deter teams from bloating up their payrolls.

Let's try an example -- this season's biggest taxpayer, the Lakers. Under the current system, the Lakers are on track to pay $21.4 million in luxury tax. That's a tidy little bill ... though it didn't give the team pause before inking Ron Artest to a five-year deal worth $34 million.

Under my suggested graduating super tax, the Lakers would pay $52.6 million in tax. As it stands, the Artest signing added $5.8 million in tax to the Lakers' expenditures this season, costing the team $11.6 million when you include his basic salary. Under the graduating super tax, Artest would have effectively cost the Lakers $32.6 million this season, which I can only imagine would have ruled the team out of bidding. When you consider the other teams in the market for Artest were also over the luxury tax threshold (namely Cleveland), you can see how this would wildly deflate the market for such players. Further, knowing how difficult the system would make future signings and augmentations would in turn prevent teams like the Lakers from committing so much money to Andrew Bynum, Lamar Odom and Pau Gasol.

Salaries get cheaper on the whole -- which was the point of the tax in the first place -- and league-wide salary parity becomes a reality. It's a double-edged sword with teams like the Lakers, Cavaliers and Mavericks, who will likely grouse about payroll growth outpacing revenue growth when it comes time to sit down and negotiate a new collective bargaining agreement, but who are the main culprits in salary growth. Those big-revenue contenders don't want to pay these high salaries, which means they should support a stronger tax, which prevents salary growth. But at the same time, they won't want to be penalized for committing to such high payrolls on an annual basis.

Either way, it'll be interesting to see how the luxury tax comes out from the other side of 2011's stand-off.