Dan Rosenbaum

Roby:

Sorry for taking so long to get back to you, but I am going to be pretty tied up for the foreseeable future, so my posts are probably going to be pretty few and far between.

I have e-mailed a couple of sources, but have not gotten any confirmation on what I speculated the disbursement policy will be. For that reason, this may not be the actual policy.

For my example, I will assume that the luxury tax threshold (61.1% of BRI) hits at $52.0M, although this will not be determined until July 2003.

Teams below $52.0M (61.1% of BRI)

- receive 100% share of the escrow (about $7.1M)
- receive 1/29th of luxury tax penalty money (about $7.1M)

Teams between $52.0M (61.1% of BRI) and $55.1M (65% of BRI)

- pay one dollar for every dollar their payroll is over $52M
- receive 70% share of the escrow (about $4.9M)
- receive a share of 1/29th of the luxury tax money ($0 to about $7.1M)

This share is equal ($55.1M - TS)/($55.1M - $52M), where TS is the team salary. For a team with a TS of $54M, their share would be about 35%, so they would get 35% of 1/29th of the luxury tax money (about $2.5M). In essence, every dollar a team spends between $52M and $55.1M costs them one dollar in luxury tax penalties and $2.27 in lost luxury tax disbursements. In other words, over this range, the marginal tax rate is not 100%, it is 327%. For a team in this range adding a $350,000 miminum salary rookie will cost them $1.5M in salary, luxury taxes, and lost luxury tax disbursements. Ouch!!

[By the way, trading for Mercer rather than Oakely is costing the Pacers $6.75M in salary, $2.1M in lost escrow, $1.8M in luxury tax penalties, and $4.1M in lost luxury tax disbursements for a grand total of nearly $15M. Double Ouch!!]

Teams above $55.1M (65% of BRI)

- pay one dollar for every dollar their payroll is over $52M
- receive 70% share of the escrow (about $4.9M)
- receive none of the luxury tax penalty money

MY ASSESSMENT OF WHERE TEAMS ARE NOW

I have assumed that Redd and Wang Zhizhi end up with Dallas.

The first number is team salary, the second is luxury tax penalties minus escrow and luxury tax disbursements, and the third is net payroll.

GET THE CHECKBOOK OUT - above luxury tax threshold, above 65% of BRI, and net payroll is higher than actual payroll - teams that will send checks to the league in July 2003

POR 105.2 48.3 153.5
NYK $93.9 37.0 130.9
DAL $76.8 19.9 $96.7
SAC $69.0 12.1 $81.1
PHI $64.6 $7.7 $72.3
LAL $63.2 $6.3 $69.5
NYJ $60.8 $3.9 $64.7
MEM $60.1 $3.2 $63.3
MIN $58.1 $1.2 $59.3
MIA $57.2 $0.3 $57.5

BARELY ABOVE THE 327% TAX BRACKET - above luxury tax threshold, above 65% of BRI, and net payroll is less than actual payroll - teams that will receive small checks from the league in July 2003

ATL $56.8 -$0.1 $56.7
MIL $55.3 -$1.6 $53.7
TOR $55.2 -$1.7 $53.5

IN THE 327% TAX BRACKET - above luxury tax threshold, below 65% of BRI, and net payroll is less than actual payroll - teams that will receive reasonable checks from the league in July 2003

PHO $54.8 -$2.9 $51.9
IND $53.8 -$6.2 $47.6
SEA $53.2 -$8.2 $45.0
SAS $52.7 -$9.8 $42.9
BOS $52.4 -10.8 $41.6

NOT PAYING THE LUXURY TAX - below luxury tax threshold, below 65% of BRI, and net payroll is less than actual payroll - teams that will receive $14.2M checks from the league in July 2003

ORL $50.9 -$14.2 $36.7
DEN $50.4 -$14.2 $36.2
UTA $49.4 -$14.2 $35.2
HOU $49.3 -$14.2 $35.1
CLE $48.9 -$14.2 $34.7
DET $48.2 -$14.2 $34.0
GSW $47.8 -$14.2 $33.6
NOH $46.6 -$14.2 $32.4
WAS $46.2 -$14.2 $32.0
CHI $44.2 -$14.2 $30.0
LAC $37.7 -$14.2 $23.5 (if Zhizhi stays with Mavs, Clips have a little cap room)

One last thing to note

The disbursement plan that I have outlined still leaves about half of the luxury tax money undisbursed (about $108.5M). Depending on how this is disbursed, this could result in further penalties for teams above the luxury tax threshold. If this money went back evenly to all 29 teams, every team would get back another $3.7M, which would mean that Memphis, Minnesota, and Miami would no longer be sending checks to the league.

BCH

This is some great work.

robyg1974

Excellent, excellent, excellent work, NCBullsFan. I'm sure that you find it as inexplicable as I do that NO mainstream NBA sportswriters have done this kind of work all summer long. I'm just glad that we have you around.

This last bit here is pretty important, though. You have only eleven teams projected under the luxury tax threshold. There is an additional $108.5ish mil yet to be disbursed in yr analysis. So it is POSSIBLE that this $108.5ish mil could be distributed among ONLY these eleven teams, correct? Each team receives nearly $10 million--MILLION!--extra dollars? What's yr take--do you think the league will disburse it to all 29 teams, or to only these eleven teams? Or perhaps only to the 16 teams in the 327% tax bracket (i.e., each of these 16 teams would receive nearly $7 million--MILLION!--additional dollars)?

Do you have a clue what the league will do with this remaining $108.5ish million? Seems to ME that, if it gets put to a VOTE among the 29 NBA owners, that 11 isn't a majority, but that 16 IS. That's how it works, right? The 29 league owners vote on how the money gets redistributed? Surely the league office doesn't get to make a unilateral decision here, right?

As it turns out, the consequences of the luxury tax are not quite as severe as you had speculated earlier this summer, although the difference between what a team like Orlando--who is just under the luxury tax threshold--is getting back and what a team like Seattle--who is just $1.2 mil over the threshold, and whose payroll is only $2.4 mil HIGHER than Orlando's payroll--is getting back is hardly insignificant: $6 million.

Of course, as you point out, a LOT hinges on what the league decides to do with that remaining $108.5 mil. If they decide to redistribute it equally among all 29 teams, well, if I were a team like Toronto, or Orlando, or Milwaukee, or Boston, or, well, one of any number of teams who made several unpopular luxury tax-driven moves (or NON-moves) this summer, I'd be pretty pissed!

Anyway, yeah, thanks for the work. Whenever you find out more on this subject, or whenever you have more thoughts on the subject, let us know. I don't go on the Bulls board very often, so if you feel like sending me another PM, to tell me that you have re-posted some stuff, I would appreciate it. Thanks again!

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Roby G.

Dan Rosenbaum

First, remember that none of what I am speculating about has been confirmed by a league source, so I could have the disbursement policy completely wrong. But my source does have a lot of contacts around the league, so there is a good chance this is right.

Second, my understanding is that the NBA Board of Governors will vote on how the remaining $108.5M will be disbursed. My impression is that this means that every team will have one vote, which would suggest that the 11 teams below the luxury tax threshold won't be sharing that $108.5M. I suspect an equal disbursement is more likely, precisely for the reason you cite.

However, note that, according to my calculations, 16 of the 29 teams would have been better off financially under an equal disbursement than they are under the current disbursement plan (assuming the remainder goes back evenly to all 29 teams). However, teams voted for this plan probably without knowing where the luxury tax threshold would hit (I think the vote was before July 2002) and there are considerations for the future that must be taken into account, but it still is a little strange that teams would vote for the current plan.

I have come to the conclusion after conversations with a few folks who might know something about this that most teams just don't have the personnel to understand all of the implications of the luxury tax. They rely very heavily on league sources for their information, making it very easy for the league to manipulate teams into voting for plans that aren't in their best interests. As an economist I find this behavior utterly unbelievable, but I am starting to come around to believing it.

Third, I am not sure Toronto, Seattle, Orlando, etc. are going to be angry if the remainder of the luxury tax penalties is disbursed back equally to all 29 teams. I think the current plan was voted on well before this summer, so it is likely that these penalties (and not the ones in my RealGM article) were driving decisions this summer. While they are not as draconian as the penalties in my RealGM article, they are, as you noted, still pretty significant.

Fourth, I think sportswriters do not write about these issues, because (1) they do not understand it themselves and (2) their readers won't understand it and will ignore the article. I have had one sportswriter make this second argument when I mentioned that he should write an article on this. I think this assessment is right, since over at RealGM, there has been practically no mention of my article, even though it has been featured on the front page for more than a month.

When I see the sophistication with which MLB writers write about financial issues and statistical analyses, I really wish that NBA writers had that same sophistication. (Ultimately I suspect this is driven by differences in NBA vs. MLB fans.) Sometimes, it seems that NBA writers are nothing much more than gossip columnists.

robyg1974

Good lord, I feel exactly--and I mean EXACTLY--the same way! Take a look at some of the baseball stuff on ESPN.com (obviously a mainstream sports product, as opposed to the sagely ramblings of a North Carolina economics professor, writing for fun (not for pay), on RealGM!)--I am a stats geek, and the world of baseball statistics is, to be honest with you, more interesting than the ACTUAL GAME of baseball ITSELF! There are always links to lots of baseball stats geeks on the baseball section of ESPN.com. Hell, Peter Gammons, the most respected baseball writer in the country, is HIMSELF a stats geek! However, like you say, we see none of this in the world of basketball. It's annoying. When the best stuff that is being written about the NBA this summer is stuff on RealGM and here on basketballboards.net, by people writing FOR FREE, as a HOBBY, that is PATHETIC!

Anyway, thanks again, NCBullsFan, for yr work and yr insight here. I agree that the irrational economic moves by numerous NBA fans is absurd. Next summer, when several teams are screaming "Foul!" because of this luxury tax stuff, I'm not going to have a lot of sympathy for them. I'm sure YOU would have been more than willing to provide them some extremely inexpensive (if not FREE) consulting regarding these matters. Have you ever considered offering your expertise to NBA franchises for a fee? An NBA luxury tax consultant? I bet you could make some decent money on the side!

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Roby G.

Dan Rosenbaum

Below is a link to an article by Frank Hughes that details the latest developments on the luxury tax issue.

http://www.tribnet.com/sports/basket...-2089198c.html

When I have time I will detail exactly what Frank is talking about.

Frank did make a couple of minor mistakes in this article, but other than that this article represents our best estimates of how the luxury tax will work. (And believe me, "our" is the correct pronoun here.)

(It would be nice if this thread could be moved or better yet cross-listed in the Salaries & CBA forum.)

Dan Rosenbaum

1729 views

I am taking the liberty to bump this thread, since it shows how important thinking about the luxury tax was last summer. Looking back, I was rather amazed at just how on the mark I was when I put together that original post.

Masbee

NCBullsFan:

It is almost one year from the original post. Are you planning to do a team-by-team luxury tax/free agent analysis this year? If so, I look forward to it. Thanks.

Marcus13

Good post- As a Sonics fan I am worried about Rashard-he doesn't seem to be to happy in Seattle but maybe now that Gary is gone....

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DownUnderWonder

entertaining work... wow Im impressed. I owe every contributer to this thread a beer.... Ull have to come to Fremantle Western Australia to collect it though

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