The NBA should replace the luxury tax with a luxury subsidy

So, one of the big sticking points between the league and the union is how "punitive" the luxury tax needs to be. The league wants at least 1.75 to 1. The players want no more than 1.25 to 1 or 1.1 to 1.


I can understand the rationale of each side: The league wants to have some sort of economic parity among teams. The players don't want a "hard(er) cap" creating a system of with some max players, lots of minimum-wage players with fewer "middle class" NBA jobs.

It strikes me that both sides are focusing on the wrong thing: Instead of arguing over the amount of "luxury tax" to punish spending, they should be giving teams "luxury subsidy" so everyone can spend like the Lakers, at least in terms of nominal contracts.

Let me know if you agree or think this is just insane.

The luxury subsidy should address both the need for parity and the desire for middle-class opportunities.

So, this is how it works:

I. The Luxury Subsidy

The Luxury Subsidy System works largely the same as the current "soft-cap" system-- with a cap on the % of league-wide BRI going to the players, a cap on team salary and individual salary, various salary exceptions, etc., with one main difference: a dollar-for-dollar "luxury subsidy" will replace the "luxury tax."

Basically, every team will be responsible for their own salary only up to a certain threshold roughly equal to 1/30 of the players' share of the BRI (i.e. the mean of team salary, which would be about $70 million based on last year's BRI, I think). If a team's salary exceeds the threshold, the money to pay the extra salary will come first from (1) an escrow funded by holding back a portion of each player paycheck (similar to the escrow under the last CBA, except for a much higher % since the overal nominal salary level will likely increase), and, to the extent the escrow is insufficient to pay for the subsidy, then from (2) a "common fund" established with contribution from every team, with each team's contribution determined by factors such as revenue, market-size, etc.-- probably the same factors used in a revenue sharing formula among the teams.

One more note: If the inability of some small market teams to spend up to the threshold is a problem (which the league may or may not view it to be), this can be addressed by additional revenue sharing.

II. The Rationale: Team Parity and Middle-Class Opportunities


A luxury subsidy would address both the need for parity and the need for middle class jobs: Because the higher end of the payroll is collectively financed (by players and by teams), a team's lack of a Lakers-sized revenue stream won't prevent it (unless it is really cheap or financially crummy) from using all of its cap room and exceptions to signing players just like bigger market teams. So, we have more financial parity among teams. We also have more middle-class opportunities for players since there will be less reason not to use the various salary exceptions. All this is done while preserving whatever revenue split that the league and the union would agree upon.


The cost of this is a "dilution" between nominal and actual salary-- basically, every player takes a pay cut to finance the # of middle-class opportunities in the league. I am thinking the dilution will be no more than 20 to 30%: If the average "nominal" salary per team is $100 million when it should really be $70 million, then every player will take a 30% pay cut: I doubt that many teams can find a way to spend that much money. First, you still need exceptions to overspend. Also, even with a subsidy, you still don't want to sign stupid contracts because cap space and exceptions are scarce commodities (For example: Eddy Curry was bad for the Knicks even though they have all the money in the world to spend).

In addition, if you are really worried about excessive dilution, you can (1) place a hard cap on top of the luxury subsidies system (at, for example, $90 mil), and (2) bump up the max nominal salary of players so that already-underpaid superstars don't get further screwed.

 

I recognize this "luxury subsidy" would screw the highest-paid players the most, even more than the current system does already. Wade is right that he's totally underpaid even under the current system since he'd be worth $30 mil or more in an open market.

Look at the last paragraph of the OP: I am proposing to bump up the nominal max salary allowed for each player to something like 40% of the (soft) salary cap (or whatever is appropriate), this should offset part of what the dilution effect would do to the top players. In fact, I think we might need to bump up the nominal salary of all existing contracts to make it a bit more fair.

Also, for every Nash and Wade, there are 20 Jared Dudleys, Mo Evanses and Derek Fishers. So, these guys get out-voted if it comes down to it.

 

Yes. And should be economically no different for the teams than what the league is already proposing: a harder cap with revenue sharing.

 

Other than alleged similarity to Herman Cain, what is wrong with it?