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David
06-14-2003, 01:07 PM
NBA taking a shot on its luxury tax

Once put into play, big-spending teams will pay, rest will benefit

06/14/2003

Richard Alm In San Antonio, where the Spurs are playing the New Jersey Nets for the championship this weekend, owner Peter Holt figures his team will make about $10 million this season.

A new arena and a long run of playoff games boosted revenue. But another key to the Spurs turning years of red ink to black may lie in the National Basketball Association's complex web of payments that includes, for the first time, a luxury tax.

In Dallas, owner Mark Cuban says that the Mavericks, measured on a cash basis, after taxes, will lose money on a season where they sold out every game in a 2-year-old arena and went deep into the playoffs before losing to the Spurs.

"We will lose however much we pay in luxury taxes, which should be about $20 million," he said.

This modern tale of two cities, NBA style, shows the financial contortions that result from sports' struggles with rising player salaries and the gap in revenue among franchises.

The NBA's current labor deal, approved in 1999, put into place a structure that penalizes teams with high payrolls when overall players' salaries and benefits exceed a certain percentage of the league's basketball revenue.

Once that happens and, this season, it probably has the NBA plunges into a wholesale redistribution that funnels money from the big spenders and players to the teams with more modest payrolls.

Once in force, this peculiar feature will draw a dividing line between profit and loss, said University of North Carolina-Greensboro economist Dan Rosenbaum, an expert on luxury taxes in sports.

"Once you stay below the threshold, you're almost guaranteed a profit," Mr. Rosenbaum said. "If you're above it, there's a very good chance you're going to lose money."

New to the game

Luxury taxes are a late addition to the sports landscape.

Major league baseball wrangled a steeper luxury tax in the new labor accord reached last year. A luxury tax might be coming in the National Hockey League.

"The reason leagues do it is because it's an effective way to keep teams from spending so much on salaries," Mr. Rosenbaum said.

The NBA's luxury-tax threshold won't be determined until the books are closed next month.

Here's how it works: Nobody pays a luxury tax until total salaries and benefits exceed 61 percent of NBA revenue. The threshold wasn't reached in the 2002-03 season, but most in the NBA assume it will be reached this year.

Franchises with payrolls over the threshold pay $1 for every $1 above the limit. The dividing line will be somewhere north of $51 million but it could be higher, Mr. Rosenbaum said.

And that's where Mr. Cuban's $20 million comes in. The Mavericks' payroll is slightly more than $70 million, Mr. Rosenbaum said.

The Spurs' payroll is at about $53 million, a figure that Mr. Holt thinks will be within the luxury-tax threshold.

"The tax is working," he told Bloomberg News. "Without it, I couldn't be in business right now. I would have had to move out of San Antonio, and I could never had kept [star] Tim Duncan."

Payback

High payrolls also trigger a transfer of money from players back to owners.

Once pay exceeds 55 percent of NBA revenue, the players put 10 percent of their earnings into an escrow account for later distribution to owners.

For the 2001-02 season, the escrow amounted to $153 million, with all but $22 million going into owners' pockets.

Most of the luxury tax and escrow money flows to teams below the tax threshold. According to Mr. Rosenbaum's estimates, the payments could make a bottom-line difference of $15 million to $20 million for those teams.

The overall result will be a stunning shift in the financial fortunes of NBA teams.

Without the luxury tax in 2001-02, the 15 highest-spending teams had a profit of $125 million, just about equal to the $122 million for the 14 lowest-spending teams.

Using Mr. Rosenbaum's projections for this year, the 15 highest-spending teams would lose about $60 million, while the 14 lowest-spending teams would see profits rise to about $290 million.

With so much money at stake, the NBA's system of payments could give some teams a path to profit without expanding the business and keep other teams from spending extra money that might improve their chances of winning.

"This isn't a completely crazy system," Mr. Rosenbaum said, "but the NBA is probably overdoing it and creating a lot of perverse economic incentives."

E-mail ralm@dallasnews.com

Online at: http://www.dallasnews.com/business/columnists/ralm/stories/061403dnspoalm.c1fee.html

Mandyahl
06-14-2003, 01:53 PM
thanks for the article...it cleared up a couple of questions i had about the luxury tax.

Rhylan
06-14-2003, 03:00 PM
Without the luxury tax in 2001-02, the 15 highest-spending teams had a profit of $125 million, just about equal to the $122 million for the 14 lowest-spending teams.

Using Mr. Rosenbaum's projections for this year, the 15 highest-spending teams would lose about $60 million, while the 14 lowest-spending teams would see profits rise to about $290 million.

This is the part that I don't like. Read that again and think about how twisted that is.

MFFL
06-14-2003, 03:23 PM
Originally posted by: Rhylan

Without the luxury tax in 2001-02, the 15 highest-spending teams had a profit of $125 million, just about equal to the $122 million for the 14 lowest-spending teams.

Using Mr. Rosenbaum's projections for this year, the 15 highest-spending teams would lose about $60 million, while the 14 lowest-spending teams would see profits rise to about $290 million.

This is the part that I don't like. Read that again and think about how twisted that is.

It's disgusting. That means that more owners will want to be like Sterling and less like Cuban. There will be little incentive to win and too much incentive to make money.

one long blue sock
06-14-2003, 04:01 PM
Yeah that might even effect the Euro's coming over. The less people are willing to spend, then they wont see as much benefits for moving