21. What is the "luxury tax?" Why does it exist? How is it determined? Who pays it?
The luxury tax is a mechanism that helps control team spending. While it is commonly referred to as a "luxury tax," the CBA simply calls it a "tax" or a "team payment." It is paid by high spending teams -- those with a team salary exceeding a predetermined tax level. These teams pay a penalty for each dollar their team salary (with a few exceptions, see below) exceeds the tax level. The tax level is determined prior to the season, and is computed as follows:
For 2011-12 the league and players association agreed to use a figure of $70.307 million for the tax level.
In 2012-13 the tax level was determined by taking 53.51% of projected BRI (see question number 13), subtracting projected benefits, and dividing by the number of teams in the league1. For 2012-13 the tax level was guaranteed to be no less than $70.307 million.
Starting in 2013-14 they apply the same formula as 2012-13, except there is no guaranteed minimum.
Starting in 2012-13, the tax level may be adjusted based on what happened during the previous season:
If the league didn't pay the players enough the previous season, i.e., if they had to cut the players a supplemental check to make their guarantee, then the shortfall, divided by the number of teams in the league1, is added to the tax level. For example, if the players are paid $15 million less in 2012-13 than they are guaranteed, then the 2013-14 tax level is adjusted upward by $500,000.
If there is an overage -- i.e., if the players were paid more (pre-escrow) than their guaranteed share in the previous season -- and the system is getting close to exceeding what the league can get back through the escrow system, then the tax level (and salary cap) may be reduced in order to put on the brakes (see question number 20 for more information).
The amount of tax a team pays depends on the season, the team salary as of the team's last regular season game, and whether the team is a "repeat offender":
For 2011-12 and 2012-13, teams pay $1 for every $1 their team salary exceeds the tax level. There is no repeater rate.
For 2013-14 teams pay an incremental rate based on their team salary. There is no repeater rate.
For 2014-15 teams pay an incremental rate based on their team salary. They pay the repeater rate if they also were taxpayers in all of the previous three seasons.
For 2015-16 and all subsequent seasons, teams pay an incremental rate based on their team salary. They pay the repeater rate if they were taxpayers in at least three of the four previous seasons.
Here are the tax rates beginning 2013-14:
Team salary above tax level Non-repeater Repeater
Lower Upper Tax rate Incremental maximum Tax rate Incremental maximum
$0 $4,999,999 $1.50 $7.5 million $2.50 $12.5 million
$5,000,000 $9,999,999 $1.75 $8.75 million $2.75 $13.75 million
$10,000,000 $14,999,999 $2.50 $12.5 million $3.50 $17.5 million
$15,000,000 $19,999,999 $3.25 $16.25 million $4.25 $21.25 million
$20,000,000 N/A $3.75, and increasing $.50 for
each additional $5 million. N/A $4.75, and increasing $.50 for
each additional $5 million. N/A
A team with a team salary $12 million over the tax level in 2011-12 pays a tax of $12 million.
A team with a team salary $12 million over the tax level in 2013-14 pays a tax of $21.25 million (the incremental maximum of $7.5 million for $0 to $4,999,999, plus the incremental maximum of $8.75 million for $5 million to $9,999,999, plus $2 million times the incremental rate of $2.50 for $10 million to $14,999,999).
A team with a team salary $4 million over the tax level in 2015-16 pays a tax of $10 million ($4 million times the repeater rate of $2.50 for $0 to $4,999,999) if they also were taxpayers in three of the previous four seasons, or pays a tax of $6 million ($4 million times the non-repeater rate of $1.50 for $0 to $4,999,999) if they were not taxpayers in at least three of the previous four seasons.