The Butterfly Effects, Pt. I: Tax the Street

Posted by Rob Mahoney on November 28, 2011 under Commentary | 4 Comments to Read

Screen shot 2011-11-28 at 11.59.57 AM

With the unofficial, metaphorical ink on the tentative CBA structure beginning to dry, we’ll take to look at how the new agreement impacts the Dallas Mavericks teams of today and tomorrow.

While James Dolan’s luxury tax spending in the mid-2000s would put any other overspending owner to shame, Mark Cuban has shown an impressive tolerance for substantial tax payments so long as the Mavericks are competitive. And, in case you hadn’t heard, Dallas has been competitive for quite some time; 11-straight 50-win seasons has not only put the twinkle in Cuban’s eye, but also the dent in his wallet.

That long-term investment finally paid off with a championship this past June, but the new, more punitive luxury tax could bring hell to Cuban’s finances if he the Mavs continue on their usual spending course. Here’s an excerpt from the league’s official memo outlining the terms of the recent agreement, as release by SI.com:

Beginning in year 3, Tax rates for teams with team salary above Tax level are as follows:

Incremental Team Salary Above Tax LevelTax Rate
$0-$5M$1.50-for-$1
$5M-$10M$1.75-for-$1
$10M-$15M$2.50-for-$1
$15M-$20M$3.25-for-$1

  • Tax rates increase by $0.50 for each additional $5M above the Tax level (e.g., for team salary $20M-25M above the Tax level, the Tax rate is $3.75-for-$1).
  • Tax rates for teams that are taxpayers in at least 4 out of any 5 seasons (starting in 2011-12) increase by $1 at each increment (e.g., for team salary $5M-$10M above the Tax level, the Tax rate for a repeat taxpayer is $2.75-for-$1 instead of $1.75-for-$1).

All of this luxury tax adjustment has been made in the hopes that the variation in spending between teams will be mitigated. Cuban himself has been a proponent of just such a position in the past; as much as out-spending the competition has been one of the Mavs’ distinct advantages, Cuban himself is naturally less than enthused about shelling out extra money for luxury tax payments. A high payroll is one thing, but a high payroll that creates further financial obligations via the tax is another one entirely.

But at this point, one can’t help but wonder how well the Mavs would maneuver in the future if they begin to show an uncharacteristic regard for the luxury tax line. These CBA changes give the tax an unprecedented bite, which Cuban and Donnie Nelson would be crazy to ignore. Yet a willingness to take on salary — think of the trade acquisitions of Tyson Chandler and Shawn Marion for two recent examples — has been one of Dallas’ most consistent means of acquiring talent. It should be interesting to see how the team’s brain trust adapts to these newfound financial considerations.

Additionally, the impending free agency period should indicate just how vulnerable the Mavs are to the threat of the “repeater” tax penalty. The actual dollar-for-dollar tax penalties of a new collective bargaining agreement may not kick in until Year 3 (2013-2014), but the 4-in-5 counter on the repeater tax begins immediately. Every year in tax territory matters, and the 2011-2012 campaign could be Dallas’ first step toward being a victim of that vicious repeater.

Re-signing either Chandler or Caron Butler would surely put the Mavs over the tax line this season, while also adding on a substantial financial commitment in years to come. Dallas does have some flexibility with Jason Kidd and Jason Terry both in the final year of their current deals, but the Mavs nonetheless have over $44 million in committed salary for 2012-2013. Factor in the possible re-signings of Kidd, Terry, Chandler, Butler, J.J. Barea, etc. (or their replacements), and it’s easy to see how the Mavs could fall into the same old luxury tax trap in their efforts to retain their championship core.

If Dallas is hit with the repeater tax by year 4 or 5 of this collective bargaining agreement, it would likely lock down the franchise in a way modern Maverick fans have never seen. It’s impossible to predict exactly how Cuban and Nelson would respond in such a situation, but most likely, the tax line would — as has been indicated throughout the collective bargaining process — act as a temporary hard cap, capable of either derailing the Mavs mid-stride or curbing their rebuilding efforts.

It’s silly to go too far down the rabbit hole of future finances; the Mavs could look very different in a year, much less in five. But the team’s consciousness of the new luxury tax modifications begins now, and so it should, too, for informed basketball fans.

Welcome to the new world.