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THE NBA LUXURY TAX MODEL: A MISGUIDEDREGULATORY REGIME

Richard A. Kaplan*

Since the rise of players unions helped equalize the bargaining powerbetween players and team owners in professional sports, sports leagues havestruggled to find economic regulatory systems that satisfy both sides. Manymechanisms have been employed; the most recent such device is the luxurytax. Current versions of the luxury taxutilized by Major League Baseballand the National Basketball Association (NBA)require that teams withaggregate player salary expenditures above a specified level are assessed a tax.This Note focuses primarily on the robust taxation system employed by the

NBA because it is likely to be used as a viable model for other leagues. Whenexamining the NBA taxation model, however, it becomes apparent that it hasserious imperfections and, in fact, works against its stated goals. This Noteuncovers the various consequences of the NBA luxury tax and offers somesolutions to its structural flaws.

INTRODUCTION

Professional team sports leagues have struggled for nearly half a cen-tury to develop effective economic regulatory mechanisms to govern theiroperations to the satisfaction of both team owners and players. Meetingthat goal has proven quite difficult, as the division of league revenueraises issues between owners and players as well as among the members of

each group individually.1

In addition, league regulatory architects mustcontend with the call for competitive balance, which posits that for aleague to be financially successful, it must foster competitiveness amongits member organizations.2

* J.D. Candidate 2005. Editor-in-Chief, Columbia Law Review, Vols. 104105.1. For example, one major source of disagreement among team owners is whether to

cap player salaries. While most teams advocate a salary cap system because it controlsrising player salaries and helps equalize the commitment of resources to talent across aleagues teams, see infra Part I.B, owners with greater resources generally prefer a systemmore closely resembling a free market so they can use their substantial wealth to outbidothers for premier talent.

2. Those who believe that enhanced competitive balance positively affects revenueargue that, if a leagues teams coordinate their economic behavior, they can maximize

their revenue production by enabling even distribution of on-field, on-ice, or on-courtsuccess. Without such cooperation, however, teams in certain markets will systematicallyoutbid others for talented players, allowing these teams to systematically dominate leagueplay, resulting in a competitive imbalance [that] will reduce the quality and attractivenessof the leagues product. Stephen F. Ross, The Misunderstood Alliance Between SportsFans, Players, and the Antitrust Laws, 1997 U. Ill. L. Rev. 519, 560; see Joseph P. Bauer,Antitrust and Sports: Must Competition on the Field Displace Competition in the

1615


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1616 COLUMBIA LAW REVIEW [Vol. 104:1615

Revenue distribution was substantially less complicated during theearly days of American professional team sports, as team owners essen-tially possessed unilateral power over the terms and conditions of the

players employment. One result of this dominance was the owner-im-posed reserve clause, which was used to depress players salaries by for-bidding players from negotiating with teams other than the ones that re-served them.3 Economic regulation of this type became morecontentious, however, with the advent of the players unions in the 1960s

Marketplace?, 60 Tenn. L. Rev. 263, 27475 (1993) (While the individual teams . . . can becompetitors in a number of respects, some measure of cooperation is essential for successof the entire enterprise.).

It should be noted, however, that those who hold this view often assume that teamspending regulation necessarily equalizes the level of each teams talent. One argumentsupporting that assumption is that big-market teams have wellsprings of revenue, therebyallowing themin an unregulated marketto expend more revenue to attract the bestplayers at the expense of small-market teams. See James Quirk & Rodney Fort, Hard Ball:

The Abuse of Power in Pro Team Sports 5657 (1999) [hereinafter, Quirk & Fort, HardBall] (stating that some argue [t]he . . . lack of competitive balance . . . lead[s] to a fall ingate receipts at small-market teams as their won-lost records decline[ ], and might evenlead to bankruptcy and exit from the league for some small-market teams); Kevin E.Martens, Fair or Foul? The Survival of Small-Market Teams in Major League Baseball, 4Marq. Sports L.J. 323, 36263 (1994) (In an environment where large-market teams havethe financial resources to attract the greatest number of quality free agents, small-marketclubs must . . . operate at a competitive disadvantage.). At the very least, proponents ofthis theory argue that the ability of some teams to spend more on player salaries thanothers gives them more margin for error and therefore a better chance at success.Andrew Zimbalist, May the Best Team Win 47 (2003) [hereinafter Zimbalist, May the BestTeam Win].

Others dispute these claims: [E]mpirical evidence rejects both the claim that ahandful of rich teams systematically outbid their rivals for star players and the claim thatdynasties result from an unrestrained labor market. Ross, supra, at 56061; see

Christopher D. Cameron & Michael J. Echevarra, The Ploys of Summer: Antitrust,Industrial Distrust, and the Case Against a Salary Cap for Major League Baseball, 22 Fla. St.U. L. Rev. 827, 853 (1995) (The main problem with competitive balance theory is the lackof empirical evidence supporting it. . . . Indeed, all the evidence points in precisely theopposite direction: baseball enjoys remarkable competitive balance without a salary cap.);see, e.g., Larry Brooks, Owners Claims Are Hot Air, N.Y. Post, Jan. 4, 2004, at 81 (rebuttingNational Hockey Leagues (NHL) calls for increased competitive balance when eightdifferent teams have filled the last eight conference slots[,] . . . and only four [were] out ofplayoff contention [at mid-season]). See generally Michael Lewis, Moneyball: The Art ofWinning an Unfair Game (2003) (chronicling success of perennially frugal OaklandAthletics).

One may be distrustful of league-based calls for greater competitive balance becausethey often correspond to a request for further salary regulation. See Robert C. Berry et al.,Labor Relations in Professional Sports 67 (1986) (declaring that leagues use mechanismsto regulate salaries in the name of competitive balance while those mechanisms not-so-

coincidentally restrict[ ] competitive bidding for players services). Regardless, this Noteassumes that competitive balance is a goal of team owners in part because it is often thevery aim for which they advocate. See, e.g., Pre-Hearing Brief of Natl Basketball Assn at 6,Natl Basketball Players Assn and Natl Basketball Assn (System Arbitrator 2002) (No. 02-01) (on file with the Columbia Law Review) (calling competitive balance one of two ofleagues broad objectives).

3. See infra notes 1217 and accompanying text.


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2004] THE NBAS MISGUIDED TAX 1617

and 1970s. After the Major League Baseball Players Association(MLBPA) and National Football League Players Association (NFLPA)both weakened their respective leagues reserve clauses through arbitra-

tion and litigation in the mid-1970s,4

leagues sought alternative ways tocontrol costs through player movement limitations.5 Even these modelsof restrictionsuch as requiring teams that sign a free agent to providethe players previous team with player or draft pick compensationwereconstrained further as the strength of the players unions grew. New andinnovative regulatory systems were eventually needed to assuage the grow-ing economic concerns of players and owners alike.

One modern solution has been to adopt a luxury tax. Pioneeredby Major League Baseball (MLB) in the mid-1990s and recently adoptedby the National Basketball Association (NBA), the luxury tax as it cur-rently exists is a penalty imposed on teams that spend above a collectivelybargained level.6 The luxury tax is an attractive regulatory device be-cause, in theory, it addresses the concerns of all parties. For owners, de-

pending on the level of taxation, the luxury tax can be viewed as a quasi-salary cap; it may serve as a roadblock to continued spending. For play-ers, the tax represents freedom from a salary cap and still offers thepromise of unlimited salary growth. And finally, competitive balance maybe achieved through a luxury tax regime by punishing big-spendingteams and perhaps even redistributing the money collected to less afflu-ent teams.

This Note explores the implications of the NBA luxury tax model(NBA Model), which packs the sort of regulatory punch that potentiallymakes it an example for other leagues to follow. This robust model, acomplicated combination of escrow, tax, and distribution components,encourages teams to spend less on player salaries with the goal of increas-

ing the profitability of the league as a whole.7

This Note demonstrateshow the NBA Model, although successful in discouraging some teamplayer salary expenditures, creates perverse incentives that in fact lead togreater disparity in team spending and frustrate the objectives of otherimportant aspects of the NBAs current collective bargaining agreement.These problems combine to produce a perpetual cycle where free-spend-ing owners reap the benefits of better and cheaper talent while avoidingtax assessments. This sequence is the result of a number of imperfectionsin the design of the NBA Model, including a wildly inconsistent marginaltax rate.

4. See Charles P. Korr, The End of Baseball as We Knew It: The Players Union,196081, at 14967 (2002) (detailing the Messersmith Case, an arbitration case between

Major League Baseball and its union, which resulted in dismantling of reserve clause).5. See infra Part I.A.3.6. A tax can also be placed on the revenue teams earn. See, e.g., Basic Agreement

Between the 30 Major League Clubs & Major League Baseball Players Association, EffectiveSept. 30, 2002, art. XXIV, at 100 [hereinafter 2002 MLB CBA].

7. See Pre-Hearing Brief of Natl Basketball Assn at 6, Natl Basketball Players Assn(No. 02-01).


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Part I of this Note traces the various attempts to regulate the eco-nomics of professional team sports prior to the arrival of the luxury tax.Part II explores the operation of the MLB and NBA luxury taxes, includ-

ing an examination of their corresponding tax distribution systems. PartIII takes a critical look at the NBA Model and makes a series of predic-tions about how it will operate within the larger NBA regulatory frame-work. Finally, Part IV suggests a number of changes to the NBA Modeldesigned to address more effectively the myriad issues presented by notonly the NBA system, but also those problems that arise in the context ofthe economic regimes of other leagues.

I. THE HISTORICAL DEVELOPMENT OF ECONOMIC REGULATORYMECHANISMS WITHIN PROFESSIONAL SPORTS LEAGUES

The primary mechanisms employed to internally regulate profes-sional team sports leagues can be parceled into three major categories of

both direct and indirect salary regulation: (1) restricting free agency; (2)capping team and individual player salaries; and (3) taxing team andindividual player salaries.8 A brief review of these first two devices pro-vides an understanding not only of what regulatory models have beentested, but also highlights the problems they have wrought that the thirdmechanism, the luxury tax, is intended to address.

Part I.A traces the development of restrictions on free agency, theoriginal form of player market regulation. Teams have restricted playersfree agency in a variety of ways over the last century and still do so in amixture of forms in all four major professional sports.9 Beginning in theearly 1980s, some leagues embarked upon a different approach, institut-ing limits on the amount each team could allocate toward player salaries.This concept was taken one step further in the 1990s, when leagues be-

gan restricting the levels at which individual players could be paid. Thesemore modern forms of economic regulation are called salary caps, andare detailed more fully in Part I.B.

A. Restricting Free Agency

The oldest method of limiting player salary growth in American pro-fessional team sports is restricting market competition for players. In a

8. This list is not exhaustiveit only covers the most significant forms of regulation.For example, team revenue sharing, player-team salary arbitration, guaranteed versus non-guaranteed contracts, and limits on the number of total contract years available mayinfluence the growth of player salaries. In the mid-1980s, MLB attempted to limit player

salary growth through collusion, whereby owners jointly decided not to make bids for freeagents. Quirk & Fort, Hard Ball, supra note 2, at 9091; Gerald W. Scully, The Business of RMajor League Baseball 3943 (1989) [hereinafter Scully, Business of Baseball]; James B.Dworkin & Richard A. Posthuma, Professional Sports: Collective Bargaining in theSpotlight, in Collective Bargaining in the Private Sector 217, 23637 (Paul F. Clark et al.eds., 2002).

9. They are MLB, the NBA, the National Football League (NFL), and the NHL.


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pure market setting, players can freely offer their services to each teamand create competition among those teams to achieve the highest possi-ble compensation. By instituting restrictions on player movement in an

attempt to regulate supplye.g., permitting players to become un-restricted free agents10 only when certain conditions are metteams canlimit the ability of players to extract their pure market value, potentiallydriving down the overall growth of salaries.11 The market can also beregulated from the demand side by discouraging teams from participat-ing in the market through mechanisms that require teams to providesome form of compensation when they sign a free agent from anotherteam.

1. The Reserve Clause. The first attempt to curb the marketthrough free agency restriction was the reserve clause. The reserve clausewas shaped by professional baseball in the late nineteenth century,12 asteam owners were able to protect team rights to certain players perma-nently so that no other team could negotiate with them.13 Players there-fore either played for the team that reserved them or were forbiddenfrom playing in the league at all.

Given this significant advantage for team owners, it was not longbefore professional basketball, football, and hockey leagues employed va-rying forms of the reserve clause.14 Oddly enough, the reserve systemhad the support of the players, who were convinced by management thatthe reserving power was necessary to maintain the economic viability of

10. An unrestricted free agent is one for whom the original team has no matchingrights and/or for whom no compensation is required. See, e.g., NFL Collective BargainingAgreement, Jan. 8, 2002 (as amended), art. I, 2(ah), at 6 [hereinafter 2002 NFL CBA]

(stating that an unrestricted free agent is a player who completes performance of hisPlayer Contract, and who is no longer subject to any exclusive negotiating rights).

11. This is not to say that a pure market setting would yield net benefits for everyplayer. For example, certain collectively bargained guarantees, such as a minimumallowable salary, enable some players to earn more than would otherwise be available if noregulation existed whatsoever.

12. The reserve rule was invented by Boston Braves owner Arthur Soden in 1879 butwas not officially installed until 1883. Quirk & Fort, Hard Ball, supra note 2, at 55; Scully, RBusiness of Baseball, supra note 8, at 23. The National League, which was formed prior Rto the American League in 1876, instituted its reserve clause as a private agreement amongthe teams in which exclusive property rights were granted to five players for each team.Id. at 2. The system apparently worked, as player salaries fell in relation to revenues, andteams began to make profits for the first time. Id.

13. See Am. League Baseball Club of Chi. v. Chase, 149 N.Y.S. 6, 10 (Sup. Ct. 1914)(quoting section 3, article VI of the National Agreement [for the government ofprofessional baseball]: The right and title of a major league club to its players shall beabsolute . . . .). For more on the history of the reserve clause, see Gerald W. Scully, TheMarket Structure of Sports 1112 (1995); Jack F. Williams & Jack A. Chambless, Title VIIand the Reserve Clause: A Statistical Analysis of Salary Discrimination in Major LeagueBaseball, 52 U. Miami L. Rev. 461, 47273 (1998).

14. Quirk & Fort, Hard Ball, supra note 2, at 1112, 18, 22. R


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the game.15 It was not until the rise of the players unions that the ath-letes naivete faded, and they realized how such systems worked againsttheir earning power.16 Baseballs reserve clause, for example, was eviscer-

ated by arbitration and subsequent collective bargaining with the MLBPAin the mid-1970s.17

2. The Rozelle Rule and Its Offshoots. The NFL encounteredproblems with its own reserve system ten years before baseballs was dis-mantled.18 As a result, NFL Commissioner Pete Rozelle developed whatwidely became known as the Rozelle Rule, which was designed to re-strain player salaries by empowering the Commissioner to award compen-sation to a team losing its own free agent by the team signing that freeagent.19 The result was striking: Between 1963 and 1974, of the 176 play-

15. Id. at 52, 58. Some players even testified before Congress in the 1950s in an effortto keep the reserve system intact. See Andrew Zimbalist, Baseball Economics and AntitrustImmunity, 4 Seton Hall J. Sport L. 287, 290 (1994). Some of this thinking can be ascribed

to the fact that, until the mid-1970s, most professional sports associations or unions wereessentially company unions. Quirk & Fort, Hard Ball, supra note 2, at 51. Another majorfactor was the general societal sense that athletes were fortunate to be getting paid forplaying essentially a kids game. Id.; Paul D. Staudohar, Playing for Dollars: LaborRelations and the Sports Business 3 (1996) [hereinafter Staudohar, Playing for Dollars](In the decades before unions and collective bargaining became ingrained in the sportsindustry, professional athletes were treated like privileged peons.).

16. See Quirk & Fort, Hard Ball, supra note 2, at 5152; Staudohar, Playing for RDollars, supra note 15, at 34. Professors James Quirk & Rodney Fort put the impact of the RMLBPA on the reserve clause plainly: Changes in the player reservation system that havetaken place in baseball since the early 1970s are due almost exclusively to the action of theMajor League Players Association . . . . James Quirk & Rodney D. Fort, Pay Dirt: TheBusiness of Professional Team Sports 19293 (1992) [hereinafter Quirk & Fort, Pay Dirt].

17. The MLB reserve clause was dealt its first major blow in late 1975, when arbitratorPeter Seitz ruled that pitchers Andy Messersmith and Dave McNally were free agents

after each played the season without a contract (i.e., their option season) as a result ofrefusing their clubs offers following the previous season. Scully, Business of Baseball,supra note 8, at 37; see Quirk & Fort, Hard Ball, supra note 2, at 6162 (Arbitration Raccomplished what one hundred years of baseball history had been unable to do, namelyeliminating the reserve clause.). Professor Scully claims that [p]rior to the Messersmithdecision players were paid just a small fraction of their actual contribution to teamrevenues and with the coming of free agency, clubs bid against each other for . . . talent,making rational decisions about the value of the player to the club relative to his marketprice. Scully, Business of Baseball, supra note 8, at 153. In basketball, the reserve clause Rwas terminated through a court-approved settlement in Robertson v. National BasketballAssociation, 72 F.R.D. 64, 67 (S.D.N.Y. 1976) (approving settlement that provid[ed] forthe elimination of the reserve clause, a phaseout of reserve compensation, [and] asettlement fund for the class of $4.3 million).

18. The NFLs reserve structure, like that of baseball, operated as part of an optionsystem. See supra note 17. While teams technically could sign players that played out their R

option years, there was a gentlemans agreement among the owners not to do so. Quirk& Fort, Pay Dirt, supra note 16, at 19091. When the Baltimore Colts owner violated this Ragreement in 1963, the NFL moved quickly to formalize its previous policy. Id.

19. The rule stated:[A] player, even after he has played out his contract under the option rule andhas thereby become a free agent, is still restrained from pursuing his business tothe extent that all league members with whom he might otherwise negotiate for


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ers to play out their option years, a paltry thirty-four signed with otherteams, and only in four of those cases was compensation necessary. 20 Af-ter feeling the harsh effect of the Rozelle Rule, the NFLPA brought a

series of legal actions against the NFL, weakening the Rule in one federaldistrict court,21 considerably circumscribing it in another,22 and finallygetting it struck down by the Eighth Circuit in 1976.23

The demise of the reserve system and Rozelle Rule led all fourleagues to develop more limited forms of restricted free agency. Thesesystems run the gamut in terms of the role they play within league regula-tory systems overall. For example, the NFL, which now has a rigid salarycap as its regulatory linchpin, utilizes a mild form of restricted freeagency that only affects a couple of players per team per season. 24 On

new employment are prohibited from employing him unless upon consent of hisformer employer or, absent such consent, subject to the power of the NFLCommissioner to name and award one or more players to the former employer

from the active reserve or selection list of the acquiring clubas the NFLCommissioner in his sole discretion deems fair and reasonable.

Kapp v. Natl Football League, 390 F. Supp. 73, 82 (N.D. Cal. 1974) (emphasis added).20. Mackey v. Natl Football League, 543 F.2d 606, 611 (8th Cir. 1976). Compare this

with the most recent data, which shows that, prior to the 2004 NFL season, a whopping 515free agents changed teams. M.J. Duberstein, Natl Football League Players Assn, NFL Off-Season Salary Averages & Signing Trends 145 (2004).

21. Kapp, 390 F. Supp. at 82 (We conclude that such a rule imposing restraintvirtually unlimited in time and extent, goes far beyond any possible need for fairprotection of the interests . . . or the purposes of the NFL and that it imposes upon theplayer-employees such undue hardship as to be an unreasonable restraint . . . .).

22. See Bryant v. NFL, No. CV 75-2543 HP, 1975 U.S. Dist. LEXIS 11224, at *3*6(C.D. Cal. 1975) (granting restraining order temporarily preventing enforcement ofRozelle Rule).

23. Mackey, 543 F.2d at 615 (ruling that Rozelle Rule was mandatory subject of

bargaining under National Labor Relations Act, and NFLs failure to bargain over the issuewas violation of law). In 1977, however, the NFLPA agreed to a right of first refusalcompensation system in a new collective bargaining agreement. Matthew S. Collins, NoteC: C as in Cash, Cough it Up, and ChangesNFL Players Score with Free AgencyFollowing Freeman McNeils Big Gain, 71 Wash. U. L.Q. 1269, 127475 (1993).

24. The NFLs current free agent system has two major components. First, any playerwith five or more [a]ccrued seasons of NFL playing service is automatically an[u]nrestricted free agent. 2002 NFL CBA, supra note 10, art. XIX, 1(a), at 59. A player Rwith at least three but fewer than five accrued seasons is authorized to seek offers fromother clubs after his contract expires, but if the player receives an offer, his old club mustchoose between matching it and retaining him, or letting him go to the new club in returnfor draft choice compensation. Id. art. XIX, 2(a)(b), at 6061. Also, any player whohas accrued fewer than three seasons and whose contract has expired is a restricted freeagenthis free agent team is only required to offer a one-year contract at the minimumsalary under the CBA. Id. art. XVIII, 2, at 57.

Second, free agency is subject to a relatively minor constraint under the Franchiseand Transition player tags. A player subject to the Transition tag must be offered theaverage of the top ten salaries league-wide in the players position, and he is subject to aright of first refusal by his original club. Id. art. XX, 35, at 7274. The Franchise tag,which can only be used once per season and not in conjunction with the Transition tag,requires teams to make an offer equal to the average of the top five salaries in the playersposition. Id. art. XX, 2(c)(ii), at 70. Included in salaries are roster and reporting


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the other end of the spectrum is the National Hockey League (NHL),which employs a sophisticated restricted free agency compensation sys-tem as its chief mechanism for limiting player salaries.25 Not unlike the

Rozelle Rule, the NHL requires compensation for many (but not all) ofthe free agents signed by another teamusing the players age and play-ing experience to determine the compensation required on the part ofthe signing team.26

3. The Entry Draft. In addition to the reserve clause and RozelleRule, leagues also have experimented with less explicitly severeyet per-haps equally effectivemeans of limiting player salaries through othermechanisms for restricting player movement. The entry draft is one de-rivative of the reserve clause that still exists in every major professionalteam sport. Prior to the season, each league conducts a draft wherebyteams select new players to join the league.27 The draft resembles the oldreserve system by enabling teams to acquire exclusive rights to negotiatewith players, thereby seriously constricting the players ability to seek

compensation in a competitive market.28 To temper this restriction, how-

bonuses, pro-rata portion[s] of signing bonus[es], and other payments to players incompensation for the playing of professional football. Id. art. XX, 2(e), at 71.

25. The system is a holdover from the 1970s and early 1980s, when the NHL originallyoperated based on a modified Rozelle Rule. McCourt v. Cal. Sports, Inc., 600 F.2d 1193,1194 (6th Cir. 1979). The only major difference is that compensation designed to equalizethe signing team and the former team would be awarded by an arbitrator instead of thecommissioner. See Berry et al., supra note 2, at 211 (describing equalization, whereby if Rsigning team and former team of free agent cannot agree on compensation, dispute isheard by arbitrator). Unlike the NFL model, the NHLs regulatory regime withstoodlitigation despite having similarly stern consequences. Only three arbitration cases basedon equalization were decided during that period. Id. at 212; Staudohar, Playing forDollars, supra note 15, at 155. R

26. See Collective Bargaining Agreement, NHLPA/NHL, Effective June 26, 1997 (asamended), art. 1, at 3, art. 10, at 2337 [hereinafter 1997 NHL CBA]. At one time, NHLteams losing a free agent had the option of selecting an active playeras opposed to adraft pickfrom the signing teams roster, although compensation now is restricted solelyto draft choice compensation. See id. art. 10, at 3536. Under the 1982 NHL collectivebargaining agreement, a team that signed another teams free agent for $200,000 or morehad to compensate the original team with two first-round draft choices or a first-rounddraft choice plus a player on the active roster. Berry et al., supra note 2, at 227. R

27. To foster competitive balance, each league allows its teams to pick incomingplayers in the reverse order of the teams winning percentages at the conclusion of theregular season. What varies among leagues is who is eligible for the draft, how manyplayers are drafted, and whether some form of lottery system is used whereby teams areassigned a percentage chance of being among the first teams to draft according to howpoorly they did in the previous season.

28. See Smith v. Pro-Football, 420 F. Supp. 738, 746 (D.D.C. 1976) (describing NFL

Draft as one that leaves no room whatever for competition among the teams for theservices of college players, and utterly strips them of any measure of control over themarketing of their talents). In Robertson v. National Basketball Association, the courtoutlined what was at stake in the collegiate draft system:

Whereas the reserve clause prevents teams from competing for veteran players,the draft prevents bidding for rookies. The net effect of the two mechanisms is toforce a player to deal only with the NBA club which owns the rights to him. If


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ever, each league designates a limit to the number of years this reserva-tion is enforceable.29

B. Salary Caps

The most effective way to temper labor costs is simply to impose acap on the amount of money teams can spend either for players individu-ally or their roster as a whole.30 Only the NBA and NFL have successfullybargained for team salary caps (Team Caps).31 Both of their Team Capmodels are based on intricate revenue-sharing schemes where a specifiedpercentage of league revenue is codified as a ceiling on aggregate playersalaries for the following season. Individual salary caps (Individual Caps),on the other hand, are currently employed by the NBA and NHL to offera more limited avenue to team owners for curtailing spending on individ-ual players.

1. The Team Cap. The NBA pioneered the Team Cap in its collec-

tive bargaining agreement with the National Basketball Players Associa-tion (NBPA) in the spring of 1983.32 In its original incarnation, the NBATeam Cap was set at the greater of either a predetermined fixed sum33 or

the player refuses to go along with the system, he will not play ball in theNBA . . . .

389 F. Supp. 867, 892 (S.D.N.Y. 1975).It should be noted, however, that another key function of the draft is to spread the

leagues incoming talent among the various teams . . . and help[ ] the weaker teams in theleague improve. Glenn M. Wong, Essentials of Sports Law 545 (3d ed. 2002).

29. See, e.g., NBA Collective Bargaining Agreement, Jan. 20, 1999, art. VIII, 1(c), at137 [hereinafter 1999 NBA CBA] (indicating that teams have rights to players chosen infirst round of draft for four years, including one option year); 2002 NFL CBA, supra note10, art. XVI, 18, at 4649. R

30. While caps on salaries might appear to be anticompetitive restrictions on trade,they have been deemed permissible if imposed as part of a collective bargainingagreement. See Wood v. Natl Basketball Assn, 809 F.2d 954, 96162 (2d Cir. 1987)(Were a court to intervene and strike down the draft and salary cap, the entire agreementwould unravel. This would force the NBA and [National Basketball Players Association] tosearch for other avenues of compromise . . . less satisfactory to them than the agreementstruck down. . . . We decline to take that step.).

31. Having concluded its most recent labor agreement, the NHL is adamant aboutreplicating the NBA and NFL player-management revenue-sharing model. See AndyBernstein, NHL Locks in on Controlling Player Costs, Street & Smiths SportsBusiness J.,Sept. 1521, 2003, at 1 (quoting NHL Commissioner Gary Bettman as saying, Even inbasketball and football, the union negotiates what share of the pie players are going toget.); see also Jeffrey Citron, Banks Have Big Stake in NHL Labor Talks, Street & SmithsSportsBusiness J., Oct. 612, 2003, at 25 (quoting Bettman as saying, We, in my opinion,need a system that links revenues and expenses . . . .).

32. Berry et al., supra note 2, at 183. While the NBA was the first league to employ the RTeam Cap, the concept of free player movement with salary constraints was firstproposed by NFLPA Executive Director Ed Garvey in the NFLs 1982 collective bargainingnegotiations. See Paul C. Weiler & Gary R. Roberts, Sports and the Law 315 (2nd ed.1998).

33. Berry et al., supra note 2, at 184. The fixed sum was $3.6 million in the first year, R$3.8 million in 19851986, and $4 million in 19861987. Id.


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53% of the leagues gross revenue minus player benefits divided by thenumber of teams in the league.34 To this day, the main feature of theNBA Team Cap is that it is soft (Soft Cap), meaning that there are a

number of exceptions teams may employ to spend beyond the TeamCap.35 These are potent exceptions: Only two NBA teams failed to usethem to exceed the Team Cap over the past two seasons. 36

Under the most recent NBA collective bargaining agreement (1999NBA CBA), the NBA Team Cap is derived from a predetermined percent-age of Basketball Related Income (BRI), which is a measure of the ag-gregate revenue produced by the league and its teams from sources suchas ticket sales, corporate sponsorships, and broadcast revenue.37 TheTeam Cap is established by taking 48.04% of Projected BRI,38 deduct-

34. Player benefits are costs paid by the NBA and include, but are not limited to,

pensions, life insurance, disability insurance, medical and dental insurance, the employersportion of payroll taxes, and a share of costs of the anti-drug program. 1999 NBA CBA,supra note 29, art. IV, 1, at 3440. Subtracting benefits further limits the growth of the Rsalary cap; since benefits are paid separately from salaries, this formula now incorporatesor gives credit to the owners for payingbenefits in the formula.

35. Examples of these are the $1 Million Exception, Mid-Level Salary Exception, andthe Larry Bird Exceptions. For a more detailed discussion of these exceptions, see infraPart III.B.2.

36. See Natl Basketball Players Assn, 20032004 NBA Preliminary ProjectedCalculation of Escrow and Tax To Be Distributed to Teams (June 2004) (on file with theColumbia Law Review) [hereinafter 20032004 Escrow & Tax Payout]; Natl BasketballPlayers Assn, 20022003 NBA Preliminary Projected Calculation of Escrow and Tax To BeDistributed to Teams (June 2003) (on file with the Columbia Law Review).

37. 1999 NBA CBA, supra note 29, art. VII, 1(a), at 52. BRI is R

[T]he aggregate operating revenues [including the value of barter transactions]received or to be received on an accrual basis . . . by the NBA, NBA Properties,Inc., including any of its subsidiaries . . . any other entity which is controlled by,or in which the NBA, Properties . . . and/or a group of NBA Teams owns at least50% of the issued and outstanding ownership interests . . . granted to ownershipinterests not owned by the NBA . . . from all sources, whether known or unknown,whether now in existence or created in the future, to the extent derived from,relating to or arising directly or indirectly out of the performance of Players inNBA basketball games or in NBA related activities.

Id. The agreement also includes income derived from things such as [r]egular seasongate receipts, all proceeds . . . from the broadcast or exhibition of, or the sale, license orother conveyance or exploitation of the right to broadcast or exhibit NBA games, allExhibition game proceeds, playoff gate receipts, in-arena sales of novelties andconcessions, sales of novelties in team-identified stores within a 75-mile radius of the area,NBA game parking and programs, Team sponsorships . . . Team promotions, temporaryarena signage, arena club revenues, summer camps . . . mascot and dance teamappearances, proceeds from premium seat licenses, and forty (40) percent of the grossproceeds from fixed arena signage and of the gross proceeds . . . from the sale, lease, orlicensing of luxury suites. Id. art. VII, 1(a)(1)(i)(ix), at 5357.

38. Projected BRI is the sum of (1) BRI from the previous year plus 8% and (2) therights fees or other non-contingent payments stated in [the NBAs television contracts]with respect to the [upcoming season]. Id. art. VII, 1(c)(1)(2), at 6869.


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ing Projected Benefits39 for the coming season, and dividing that num-ber by the number of teams in the league.40 In 20042005, the TeamCap is $43.87 million.41

In 1993, the NFL became the second league to institute a Team Capafter years of acrimonious dealings between the league and the NFLPA.42

Although the NFLs version of the Team Cap borrows the NBAs revenue-sharing concept, it is a hard or actual cap (Hard Cap), meaning thatteams cannot exceed the designated threshold by any amount at anytime. In exchange for accepting this rigid salary restriction,43 NFL play-ers receive a greater formal percentage of league revenue than their NBAcounterparts.44

39. Projected Benefits are the projected amounts to be paid or accrued by the NBAor the Teams . . . for the upcoming Season with respect to the [players] benefits to beprovided for such Season. Id. art. IV, 6, at 44.

40. There were twenty-nine teams in the NBA in 20032004, and there will be thirty in

20042005 with the addition of the Charlotte Bobcats. Since the most reliable dataavailable is based upon a twenty-nine-team league, this Note assumes in its calculations thatthere are twenty-nine teams in the NBA except where otherwise noted.

41. Press Release, NBA, Salary Cap for 20042005 Is $43.87 Million (July 13, 2004)(on file with the Columbia Law Review). This formula will be considered again in Part II, asit provides the foundation for the NBA luxury tax scheme.

42. This period included a players strike, the use of replacement players, thevoluntary decertification of the NFLPA, a precedent-setting lawsuit, and a class actionlawsuit. See Paul C. Weiler, Leveling the Playing Field: How the Law Can Make SportsBetter for Fans 10810 (2000); Dworkin & Posthuma, supra note 8, at 24749. R

43. Although, to be more precise, the NFLPA actually proposed the salary capfirst aloose version in 1982 and then a more definite one prior to the 1993 agreement. SeeWeiler, supra note 42, at 108 (Ironically, in football [the team salary] cap had been won Rby the players . . . .); Dworkin & Posthuma, supra note 8, at 247 (In 1982 the players Rdemanded a fixed percentage of NFL gross revenues (55 percent) for their salaries.).

44. The NFL salary cap percentage is 64.75%, 2002 NFL CBA, supra note 10, art. RXXIV, 4(a), at 95, while the NBA salary cap is 48.04%, 1999 NBA CBA, supra note 29, art. RVII, 2(a)(1), at 71. The NFL collective bargaining agreement determines the percentageof revenue devoted to salaries as calculated through what the agreement terms DefinedGross Revenue (DGR). 2002 NFL CBA, supra note 10, art. XXIV, 1(a), at 8693. The RNFLs DGR is similar to the NBAs BRI. See supra note 37 and accompanying text. The RDGR model is, however, less inclusive of related revenues than the BRI. DGR includes allleague and club revenues from television and radio contracts, including network, cable,and pay television, and game ticket sales. It does not, however, include major portions ofthe revenues derived from categories such as concessions, parking, local advertising andpromotion, signage, magazine advertising, local sponsorship agreements, stadium clubs,sales of programs and novelties, and portions of luxury box income and revenuegenerated by NFL Films and NFL Properties, as BRI does with regard to similar NBAsources of revenue. 2002 NFL CBA, supra note 10, art. XXIV, 1(a), at 87. Therefore, Ralthough a greater formal percentage is earmarked for player salaries under DGR, it may

yield a smaller percentage of actual league revenue.There is one additional relevant difference between the two systems. In both leagues,when a player is released from the team, the residual amount owed to the player stillcounts against the teams Team Cap number. Therefore, if Team P waives Player Q, andthe team is still obligated to pay Player Q $1 million per year for the next three years eventhough Player Q is no longer with Team P, his salary still counts against the Team Cap.Most NBA contracts are guaranteed for what is termed lack of skill. Thus, when a team


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2. Individual Salary Caps. For a league unable to compel its playersto agree to a Hard Cap, a backdoor means of achieving some measure ofsalary control is to limit the amount of money that may be paid to individ-

ual players. The NBA and NHL both employ Individual Caps for rookiessalaries (Rookie Cap),45 although only the NBA has a generally pre-scribed maximum salary applicable to veterans (Veteran Cap).46 TheRookie Caps were instituted as a two-tiered attack on player salaries. First,such caps were specifically aimed at slowing the rate of escalating salariesfor young players who had yet to prove their worth in the professionalsports context. Second, when first-year players receive large payouts in asystem without a Hard Cap, the overall market for player salaries is drivenupward.

The Veteran Cap also has a two-prong effect. Much like the RookieCap, the Veteran Cap curtails spending on player salaries by limiting theamount a team spends on any one players salary.47 In addition, by creat-ing a ceiling on the highest revenue-producing players, the market willreadjust downward, and nonmaximum salary players will be measured

releases a player whose contract contains this guarantee, his salary remains on its TeamCap. 1999 NBA CBA, supra note 29, art. VII, 4(a)(1), at 86. By contrast, less than five Rpercent of active NFL players between 1995 and 2002 had guaranteed base salaries, whichsignificantly reduces the Team Cap implications of releasing a player. See Natl FootballLeague Players Assn, A New Look at Guaranteed Contracts in the NFL 3, available athttp://www.nflpa.org/PDFs/Shared/Guaranteed_Contracts.pdf (last visited Sept. 15,2004) (on file with the Columbia Law Review) (stating that [t]he average number of playerswith guaranteed base salary from 1995 through 2002 is 40 per season). It must be noted,however, that a number of NFL contracts often include signing bonuses, which areprorated for Team Cap purposes across the life of the contract and therefore would stillcount against the Team Cap even if a player is waived. 2002 NFL CBA, supra note 10, art. RXXIV, 7(b)(i), at 100.

45. The Rookie Scale in the NBA provides for a maximum salary for each first-round draft pick based on what number selection that player is in the draft. See 1999 NBACBA, supra note 29, Exhibit B, at B-1 to B-7. The 1997 NHL CBA provided for a maximum Rdollar amount that limited the compensation teams could offer draft picks. 1997 NHLCBA, supra note 26, 9.3(a). Unlike the NBA agreement, the NHL agreement Rincorporated only one dollar amount that applies to all picksthere is no slotting basedon where a player is drafted.

46. Players who made more than the prescribed maximums at the time of the signingof the 1999 NBA CBA were granted an exception to the new individual salary limits. PaulD. Staudohar, Labor Relations in Basketball: The Lockout of 199899, Monthly Lab. Rev.,Apr. 1999, at 3, 8.

47. In the NBA, the maximum prescribed salary depends on the number of years aplayer has played in the league. For any player who has completed fewer than seven yearsof service, the maximum salary of the first year of a new contract is the greater of 25% of

the team salary cap, 105% of his previous years salary, or $9 million. 1999 NBA CBA,supra note 29, art. II, 7(a)(i), at 23. For any player with between seven and nine years of Rservice, the maximum salary is the greater of 30% of the salary cap, 105% of his previousyears salary, or $11 million. Id. art. II, 7(a)(ii), at 23. Any player who has completed tenor more years of service can receive in the first year of his new contract the greater of 35%of the salary cap, 105% of his previous seasons salary, or $14 million. Id. art. II, 7(a)(iii),at 23.


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against those whose salaries have been artificially limited by the collectivebargaining agreement.48

These Individual Caps, along with the Team Caps and restrictions on

player movement, have been designed to foster an acceptable economicand legal balance between owners and players. Only the NFL, however,notable for its relatively weak players union and exceptionally profitableproduct, has managed a modicum of labor peace under its economic reg-ulatory system.49 The three other major professional sports leagues, onthe other hand, are still struggling to achieve stable regulatory regimes.In searching for new ways to address these issues, MLB, the NBA, and theNHL have turned to the idea of taxing high-spending teams in an effortto appease both owners and players.50

II. THE LUXURY TAX

The luxury tax, an idea that first materialized during the labor nego-

tiations of both MLB and the NHL in 1994,51 was first realized in the1997 MLB collective bargaining agreement (1997 MLB CBA).52 Today,differing forms of luxury taxes exist in both MLB and the NBA. Whilethese two versions of the luxury tax have varying components, their con-ceptual frameworks share one major feature: The entity taxed is required

48. An argument can be made, however, that the maximum also becomes a numberthat is more reachable by certain players and therefore drives some salaries that wouldfall just below that level up to that level. For example, a ten-year veteran who mayotherwise be worth $12 million annually may receive the maximum salary of $14 million asa measure of respect by the signing club.

49. See Daniel Kaplan & Liz Mullen, Upshaw to Announce Early Extension Talks,Street & Smiths SportsBusiness J., Jan. 19, 2004, at 1 (stating that NFLPA and NFL will

begin talks to extend their current agreement three years before its expiration, whichwould give NFL the longest period of labor peace enjoyed by any of the Big Four teamsports).

50. In the 1999 NBA CBA, the tax is never given a formal name other than TeamPayments. 1999 NBA CBA, supra note 29, art. VII, 12(g), at 135. In the 2002 MLB CBA, Rit is referred to as the Competitive Balance Tax. 2002 MLB CBA, supra note 6, art. RXXIII, at 78. This represented an interesting change for baseball, which, under asomewhat similar taxation system in its prior agreement, termed the article XXIII tax theLuxury Tax. Basic Agreement between The American League of Professional BaseballClubs and The National League of Professional Baseball Clubs and Major League BaseballPlayers Association, Effective Jan. 1, 1997, art. XXIII [hereinafter 1997 MLB CBA],reprinted in Jeffrey S. Moorad, Negotiating for the Professional Baseball Player appx. 5A at5-39, in1 Law of Professional & Amateur Sports 5-1, 5-104 (Gary A. Uberstine ed., 2002).

51. Weiler & Roberts, supra note 32, at 317; Taylor Buckley, Baseball Luxury Tax Will RLand in the Lap of Spectating Public, USA Today, Nov. 17, 1994, at 10C. The first serious

discussions regarding the use of a tax on team payrolls occurred between the NHL and theNHLPA during their 19931995 labor negotiations. The NHL negotiations resulted in athree-month shutdown of the 19941995 NHL season, and the NHLs proposal thatincluded a 200% tax on team salaries that exceeded the average team salary was not part ofthe resulting agreement. See Helene Elliott, Season Now in Jeopardy, L.A. Times, Oct. 6,1994, at C1 (stating that NHL backed off its 200% tax proposal).

52. 1997 MLB CBA art. XXIII, reprinted in Moorad, supra note 50, at 5-104. R


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to pay a specified percentage of the margin by which its spending exceedsa mandated threshold.53

There are a number of ways in which the luxury tax concept attempts

to meet the challenges facing professional team sports economic regula-tory systems. First, when owners are unable to secure a Hard Cap, thebest substitute may be taxations near-certain drag on players salaries.54

In essence, if teams are forced to pay back to the leagueperhaps evento other teams55some percentage of what they pay their players, theywill be encouraged to rework traditional formulas for assessing the margi-nal benefits of player signings.56 Second, players, along with the minorityof owners who have the ability and willingness to outspend other owners,appreciate that the luxury tax is not an absolute ceiling on salaries.Third, leagues argue that league-wide revenue will rise under a luxury taxsystem because it promotes greater competitive balance.57

This Part examines both existing luxury tax models. Part II.A con-centrates on MLBs use of the luxury tax. MLB, the first league to write aluxury tax into its collective bargaining agreement, has moved from oneproblematic version of the tax to another. The NBA Model, the ultimatefocus of this Note, warrants more serious consideration in Parts II.B, II.C,and II.D because of its likelihood to serve as a model for other leagueslooking for innovative mechanisms to encourage team salary restraint.To grasp the underpinnings of the NBA Model, Part II.B will explain thecontext in which the tax was first adopted, while Part II.C will give a de-tailed account of its operation. Part II.D takes the analysis one step fur-ther, uncovering two important effects of the NBA Model. Understand-ing these two effectsthe Threat Effect and the Marginal TaxEffectis essential for a thorough evaluation of the effectiveness of theNBA Model.

A. The Two Incarnations of MLBs Luxury Tax

After highly contentious negotiations beginning in 1994 and last-ing until 1996,58 MLB and the MLBPA finally came to an agree-

53. Baseball also has a process by which it taxes team revenue, under the heading ofrevenue sharing.

54. See Lisa Dillman, Players Submit New Plan, L.A. Times, Oct. 11, 1994, at C1(quoting NHLPA boss Bob Goodenow as saying that any tax is a drag on salaries); LenHochberg, Hockey Stays in Deep Freeze, Wash. Post, Oct. 29, 1994, at H1 (citing leagueofficials as wanting a substantial tax to slow salary growth).

55. See infra notes 102107 and accompanying text. R

56. Indeed, if a player expected to produce $1 million in revenue actually cost histeam $1 million plus a 50% tax on that salary, the total $1.5 million signing cost would nolonger be efficient for that organization.

57. See supra note 2 and accompanying text. R

58. This included what Professor Paul Staudohar called the mother of all sportsstrikes. Staudohar, Playing for Dollars, supra note 15, at 49. The strike to which he refers Rlasted 232 days and forced the cancellation of the 1994 World Series. Id. at 4950.


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ment59 over acceptable salary control mechanisms, including the firstever professional sports luxury tax.60 The tax operated based on an ad-justable threshold level that determined which teams were deemed to be

overspenders.61

The tax adjusted by permitting the minimum thresholdto be raised such that a maximum of only five teams could exceed it inany given year.62 The tax was to be assessed for only three of the agree-ments five years, at a minimum total payroll of $51 million in 1997, $55million in 1998, and $58.9 million in 1999.63 In terms of the level oftaxation, there was a flat rate of 35% charged on each dollar a team spentabove the threshold in 1997 and 1998 and 34% in 1999.64 The proceedsof the luxury tax payments were divided in several ways. The first $17million was earmarked for the League revenue sharing plan,65 at least $3million to the Industry Growth Fund (IGF),66 and up to $2.5 million toteams overcharged during previous luxury tax calculations.67

As one might expect, the taxes were rather soft.68 For example,the greatest tax imposed in 1998 was on the Baltimore Orioles, whose$79.5 million payroll earned them a meager $3.1 million tax, or 3.9% oftheir aggregate player salary expenditures.69 The adjustable mechanismkicked in because the midpoint between the fifth and sixth teams was

59. This agreement, which was signed in December, 1996, followed the 19941995strike. Dworkin & Posthuma, supra note 8, at 239. R

60. Weiler, supra note 42, at 116; Dworkin & Posthuma, supra note 8, at 239. R

61. 1997 MLB CBA art. XXIII, B(3), reprinted in Moorad, supra note 50, at 5-105. R

62. Id. art. XXIII, B(3)(b), at 5-105 to 5-106. The CBA took the midpoint betweenthe fifth and sixth teams at the threshold as long as it was above the minimum designatedlevel.

63. Id. art. XXIII, B(2), at 5-105. This minimum was only necessary if thearithmetic mean of the fifth and sixth highest spending teams fell below those numbers.

Id. art. XXIII, B(3)(a), at 5-105.64. Id. art. XXIII, B(5), at 5-106.

65. Id. art. XXIII, H(1)(2), at 5-119. Under this plan, only the bottom fiveAmerican League clubs in net local revenue receive luxury tax distribution payments.[E]ach of the five (5) American League Clubs that rank[ ] the lowest in Net LocalRevenue for 1996 shall be paid an additional $1.4 Million on February 1, 1998. Suchpayments shall be funded by Luxury Tax proceeds for the 1997 Contract Year pursuant toArticle XXIII . . . . Id. art. XXV, C(1)(b), at 5-126 to 5-127.

66. Id. art. XXIII, H(3), at 5-119. The objective of IGF is to promote the growth ofbaseball in the United States and Canada, as well as throughout the world. Id. art. XXVI, A, at 5-136.

67. Id. art. XXIII, H(4), at 5-119 to 5-120. Overcharging may occur if a playerdoes not receive an option buyout, id. art. XXIII, E(5)(b)(ii), at 5-112, if a club optionyear is not exercised, id. art. XXIII, E(5)(c)(ii)(C), at 5-113, or if a player nullifies anoption year, id. art. XXIII, E(5)(d)(iii), at 5-114.

68. Weiler, supra note 42, at 116; see also Bryan Day, Labor Pains: Why Contraction Is RNot the Solution to Major League Baseballs Competitive Balance Problems, 12 FordhamIntell. Prop. Media & Ent. L.J. 521, 572 (2002) ([I]t is worth noting that in the threeseasons in which the luxury tax was in effect the tax had no discernible impact on thegrowth of player salaries.).

69. Mark Maske, Orioles to Pay Most in Luxury Tax, Wash. Post, Jan. 9, 1999, at D8.


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approximately $70 million,70 and as a result, every player the Oriolessigned over that mark cost the team 135% of his actual salary.

In the most recent baseball agreement (2002 MLB CBA), the two

sides again agreed on a luxury tax, although this time it has a differentname and structure. As opposed to being called a luxury tax as it was inthe 1997 MLB CBA,71 the updated article XXIII is now called the Com-petitive Balance Tax.72 In addition, the adjustable threshold mechanismwas eliminated. The tax threshold is now simply a flat number$117million in 2003, $120.5 million in 2004, $128 million in 2005, and $136.5million in 2006.73 In terms of the percentage that offenders are taxed, in2003 the tax rate was a straight 17.5% for every dollar spent above thethreshold.74 Beginning in 2004, however, different rates apply, depend-ing on whether a team is a first-time, second-time, and/or consecutive-year offender.75 The tax distribution system also was altered, with thefirst $5 million of tax proceeds held in reserve for any tax refunds basedon after-calculation adjustments,76 50% of the remaining proceeds usedto fund active player benefits,77 25% designated for projects and otherefforts to develop baseball players in countries where organized highschool baseball is not played,78 and 25% once again dedicated to theIGF.79

The early returns on the 2002 version of the MLB tax demonstrate itsutter ineffectiveness.80 The first year of the new taxation system, 2003,

70. See supra note 62 and accompanying text. R

71. 1997 MLB CBA art. XXIII, reprinted in Moorad, supra note 50, at 5-104. R

72. 2002 MLB CBA, supra note 6, art. XXIII, at 78. R

73. Id. art. XXIII, B(2), at 80. According to Professor Andrew Zimbalist, theowners initial proposal was for a threshold beginning at $98 million taxed at a rate of

50%, while the players countered with a threshold of $137.5 million taxed at 15%.Zimbalist, May the Best Team Win, supra note 2, at 111. R

74. 2002 MLB CBA, supra note 6, art. XXIII, B(3)(a), at 80. R

75. In 2004 and 2005, a first-time tax threshold violator will be assessed a 22.5% tax onits overage. Id. art. XXIII, B(3)(b), at 80. For second-time offenders, the tax rate will be30%, while the rate for a third- or fourth-time offender is 40%. Id. art. XXIII, B(3)(c)(d), at 8081. To round out the system, a first-time offender in 2006 is notassessed any tax, while a team above the threshold in 2006 but not in 2005 also avoids anypenalty. Id. art. XXIII, B(3)(b)(c), at 80.

76. Id. art. XXIII, H(1), at 99. This section also allows for an additional $5 millionto be dedicated for the same purpose should the parties to the agreement agree to thisadjustment. Id.

77. Id. art. XXIII, H(2), at 99.

78. Id. art. XXIII, H(3), at 99.

79. Id. art. XXIII, H(4), at 100.

80. Murray Chass, Marlins Rebuild, but Uncertainly, N.Y. Times, Jan. 10, 1999, 8, at8 (saying that the tax hasnt worked); Tom Haudricourt, Tax Provides Little Luxury:Product of Labor Dispute Fails to Curb Spending, Milwaukee J. Sentinel, Jan. 17, 1999, atSports 15, available at 1999 WL 7652912 (The tax . . . is a joke.). Respected baseballwriter Bob Verdi referred to the baseball luxury tax as flimsy and annoying at best. BobVerdi, Falling in Love Again with the Old Pastime, Chi. Trib., Oct. 26, 2003, 3, at 13.


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produced only one taxpayer, the New York Yankees.81 From this data itmight appear that the taxation system was in fact effective because teamswere forced to hold down their salary expenditures, leaving only the

Yankees in violation. However, only three teams spent within 10% of the$117 million mark during the previous season,82 suggesting that mostteams decisions to stay below the tax threshold in 2003 were based lesson the impending imposition of the luxury tax than they were on preex-isting economic considerations.

B. The History of the NBA Luxury Tax

The more intriguing of the two taxation systems is the NBA Model.While MLBs luxury tax model is quite limited, the one currently em-ployed by the NBA clearly has been designed and implemented to have amajor impact on the leagues overall regulatory regime.

The current version of the NBA luxury tax was the product of two

rounds of collective bargaining. The first round occurred in 19941995,after the previous collective bargaining agreement expired and the sea-son was played under a no strike/no lockout agreement. These negoti-ations were extremely contentious, causing one union chief to resign83

and another almost to lose his constituency altogether.84 The main

81. Bill Shaikin, Rich Tradition: Yankees Uncanny Ability to Make Money and Spendon Talent Cuts into the Attempts at Parity, L.A. Times, Apr. 1, 2004, at D1.

82. Ross Newhan, Start Spreading the Payroll Blues, L.A. Times, Nov. 13, 2002, at D1.83. See Richard Justice, Finally, NBA Reaches Its Own Labor Day, Wash. Post, Sept. 5,

1995, at C1 [hereinafter Justice, NBA Reaches]. Justice says sources told him that formerNBPA chief Charles Grantham was forced out because of alleged questions regarding hishandling of his expense account [while o]ther sources said players didnt like the slowpace of negotiations, they didnt like the strike talk and they didnt like the fact that no

new agreement was in place. Id.84. Grantham was replaced by Simon Gourdine, a former NBA deputy commissioner

who had joined the union in 1990. See John Helyar, Pro Basketball Loses Its Feel GoodImage in Nasty Labor Dispute, Wall St. J., Aug. 7, 1995, at A1 (documenting summer ofdiscontent between NBA and NBPA in 1995). Gourdine proceeded to negotiate a dealwith the league that included a luxury tax. Richard Justice, NBA Owners Prepare forLockout, Wash. Post, June 30, 1995, at B8. When the majority of players, largely leftuninformed as to the specifics of Gourdines negotiations, were let in on the terms of thedeal, they were outraged. See Mark Asher, Jordan, Ewing Join Class-Action Lawsuit, Wash.Post, June 29, 1995, at B6 (describing actions of several star players trying to overturn newcollective bargaining agreement agreed to in principle by union); Jackie MacMullan,Players Suing NBA, Boston Globe, June 29, 1995, at 39 (quoting former New York Knickand NBPA President Patrick Ewing as saying, The deal the union accepted was not a fairdeal). The agreement allowed teams to continue exceeding the Team Cap, but,beginning in the third year of the deal, a team exceeding the cap would be assessed a

luxury taxa 100% tax for every dollar of a free agent contract that was raised over thefinal year of the previous deal by more than 10%. Justice, NBA Reaches, supra note 83. RFor example, if a team wanted to sign a player making $1 million to a new contract at $2million, it would have to pay the league another $900,000. Id.

In response to the deal Gourdine originally negotiated, some players began amovement to decertify the NBPA under the theory that labor law would no longer apply tothe bargaining relationship if there were no union representing the players, thereby


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source of disagreement was over the leagues desire to implement a lux-ury tax. Given the players conviction on the issue, the two sides eventu-ally reached an agreement that left the luxury tax behind. 85

Luxury tax consideration was not dormant for long, as the NBA own-ers, who voted to reopen the collective bargaining agreement during the19971998 season,86 locked out the players on July 1, 1998, with inten-tions of garnering greater cost-control mechanisms.87 The players shareof BRI under the Soft Cap regime had risen to 57%.88 This led the own-ers to stand firm on their demands, resulting in the first work stoppageinvolving cancelled games in the NBAs labor history.89 When a deal wasfinally reached in January 1999 (1999 NBA CBA), in addition to limitingindividual player salaries90 and gaining longer-term commitments fromrookies to the teams holding their rights,91 the NBAs biggest achieve-ment was its coveted luxury tax system.92

C. How the NBA Luxury Tax System Works

The NBA luxury tax operates as part of a larger regulatory schemecalled the Escrow and Team Payment (or tax) system.93 To fully compre-

opening up the NBA to potential antitrust violations. See Marc J. Yoskowitz, Note, AConfluence of Labor and Antitrust Law: The Possibility of Union Decertification in theNational Basketball Association to Avoid the Bounds of Labor Law and Move into theRealm of Antitrust, 1998 Colum. Bus. L. Rev. 579, 59699, 611 (detailing unique factors ofpotential decertification within realm of professional sports). The pressure applied bythese players resulted in Gourdine returning to the bargaining table, which in turn, led tothe failure of the decertification movement. Id.; Justice, NBA Reaches, supra note 83. R

85. Murray Chass, N.B.A. Owners Settled Rather than Risk More, N.Y. Times, Aug. 10,1995, at B11; see Mark Asher, NBA, Union Beat Deadline with New Deal, Wash. Post, Aug.9, 1995, at C1 (describing owners capitulation on luxury tax after players strong

opposition to provision in summers first tentative deal); Anthony Bianco, David Stern:This Time, Its Personal, Bus. Wk., July 13, 1998, at 114, 116 (In the end, it was [NBACommissioner David] Stern who blinked, recommending that the owners accept a newcontract that . . . scuttled the luxury tax.).

86. The 1995 NBA collective bargaining agreement originally had a six-year term,although the NBA had the right to reopen negotiations if the players share of BRIexceeded 51.8%. NBA Collective Bargaining Agreement, Sept. 18, 1995, art. XXXVIII, 2(a), at 185.

87. Mark Asher, Lockout Issues Began Long Time Ago; Players Union, NBA OwnersHave Not Met Face-to-Face in 23 Days, Wash. Post, July 15, 1998, at C6.

88. Weiler, supra note 42, at 107. R89. See Dworkin & Posthuma, supra note 8, at 244 (stating that 437 games were R

missed due to lockout).90. See supra Part I.B.2.91. Frank Swoboda, This Round May Go to Owners, Wash. Post, Jan. 8, 1999, at C5.

92. It should be noted that the players presented their own version of the luxury tax;had it been implemented, it would have had little or no effect on team spending. TheNBPA proposed to tax individual salaries above $18 million, which would only affect ahandful of players. See Mike Wise, N.B.A. Is Canceling Its First Two Weeks, N.Y. Times,Oct. 14, 1998, at A1.

93. This is the closest thing to an official name for the system, although there is noformal equivalent to MLBs Competitive Balance Tax. The luxury taxcalled Team


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hend the NBA Escrow and tax system, it first is necessary to understand itsconceptual foundations. Not only did the NBA set out to limit playersalaries as a general matter, it chose to do so in a way that approximated

its preferred regulatory mechanism: the Hard Cap. The framework toaccomplish this was already in place. Recall that, as detailed in Part I.B.1,the NBA Team Cap is determined by taking a percentage of ProjectedBRI (48.04%), subtracting Projected Benefits, and then dividing thatnumber by the number of teams in the league. The owners biggest ob-jection to the existing system was that the players share of league revenuefar exceeded not only the 48.04% levelwhich the owners had acceptedgiven the explicit NBA Team Cap loopholesbut also some secondarypercentage to which they ultimately wanted to cap total player salaries.

With the owners desire to limit player salaries to a specified percent-age of league revenues and the players steadfast rejection of a Hard Cap,the two sides developed a creative mechanism aimed at further limiting

the players share of BRI while not quite using it as an absolute ceiling.From the league perspective, the Escrow and tax system is designed toserve both as a form of insurance against player salaries rising above aspecified percentage of league revenue and as a penalty against free-spending teams. To accomplish this, the Escrow component dictatesthat, during each season in which there is a Projected Overage, teamowners withhold and put into escrow 10% of all players salaries.94 At theconclusion of each season, if after calculating that seasons BRI, finalteam salaries, and player benefits, it is determined that player salaries andbenefits have exceeded a designated percentage of league revenues (e.g.,55% in 20032004) (Escrow Threshold),95 then the Escrow funds will beused to reimburse the owners to the point where the players total salariesare reduced to that percentage. For example, if in 20032004 it had

been determined that total player salaries and benefits accounted for58% of BRI, then the Escrow Threshold would have been crossed, andthe owners would receive the amount of escrowed salaries that would re-turn the players take to 55%. The remaining escrowed money would bereturned to the players relative to their individual contributions.

Payments in the agreementis tucked away under section 12(g) of article VII, which isentitled Escrow Arrangement. While most of section 12 deals with the Escrow piece ofthe regulatory system, there is no escrow component to the luxury tax other than that itkicks in when the escrow account has been depleted. See infra notes 9699 andaccompanying text.

94. 1999 NBA CBA, supra note 29, art. VII, 12(d)(1), at 12829. A Projected ROverage is the forecasted amount by which players salaries and benefits will exceed theEscrow Threshold. Id. art. VII, 12(b)(14), at 127.

95. The current NBA CBA calls for the designated compensation adjustmentpercentage to be 55% in years 20012002, 20022003, and 20032004, and 57% in20042005. See id. art. VII, 12(c)(3), at 128. This Note will operate on the basis of the20012004 figure.


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The Escrow has a ceiling, however, of 10% of the players salariesand benefits.96 Should the 10% Escrow not cover the Overage (i.e., theamount by which the players share of BRI exceeds the designated per-

centage), the Escrow account would be exhausted and the luxury taxwould be activated. In other words, using 55% as our Escrow Threshold,the luxury tax becomes active when the percentage of league revenuereceived by the players in the form of salaries and benefits exceeds 61.1%of BRI (Penalty Threshold)the 20032004 designated percentage of55% being 10% less than 61.1%.97 If that occurs, any team whose playerssalaries exceed 1/29th98 of 61.1% of BRI minus player benefits will beassessed a tax.99 It is important to underscore that the tax is not assessedon teams merely exceeding the Team Cap figure (48.04%) or even theEscrow Threshold number (55% or 57%, depending upon the year);rather the Penalty Threshold only becomes effective when player salariesand benefits exceed the escrowed money61.1% or 63.3% of BRIandis only applied to teams whose expenditures exceed that same threshold.

The 1999 NBA CBA also sets forth the level at which Penalty Thresh-old violators are taxed. During negotiations, the NBA pushed for asmuch as a 200% tax100 and settled for a 100% tax rate on any moneyspent by teams beyond the Penalty Threshold.101 Therefore, if a teamwas $5 million over the 61.1% Penalty Threshold during 20032004, andthe tax was in effect (i.e., if total player salaries and benefits exceeded61.1% of BRI), it would be assessed $5 million in taxes.

What is conspicuously missing from the 1999 NBA CBA, however, isan outline detailing tax-proceed distribution. While the result of such adecision significantly affects the impact of the tax, the only mention oftax-proceed in the agreement is in article VII, section 12(h)(1):

96. Id. art. VII, 12(c)(d), at 12830. For example, after the 20012002 season,players salaries and benefits were approximately 59.8% of league revenues, which did notrequire the full 10% Escrow. Chris Sheridan, Arbitrator Rules in Favor of NBA, AssociatedPress Online, Sept. 25, 2002, available at http://global.factiva.com (on file with theColumbia Law Review) (noting that, of $154 million collected, approximately $23 millionwas returned to players). Therefore, not only was the luxury tax portion of the Escrowarrangement dormant, but the players were eligible to receive back some of their escrowedsalary money as well. In addition, for the transition season into the Escrow and taxarrangement, the NBPA negotiated for a payment to the players should BRI and benefitsnot increase over the prior year by at least $50 million. 1999 NBA CBA, supra note 29, art. RVII, 2(d)(7), at 75.

97. This represents the figure through 20032004; because the league exercised itsoption to extend the agreement for 20042005, the luxury tax will now be activated at63.3% of BRI (corresponding to a 57% Escrow Threshold). See 1999 NBA CBA, supra

note 29, art. VII, 12(c), at 128, 12(g), at 135. R98. Based on the twenty-nine teams in the NBA for the 20032004 season.

99. 1999 NBA CBA, supra note 29, art. VII, 12(g), at 135. R

100. Mark Asher, NBA Calls Off Meeting with the Players Union: Cancellation ofEntire Season Looms Larger, Wash. Post, Nov. 26, 1998, at B1.

101. 1999 NBA CBA, supra note 29, art. VII, 12(g)(1), at 135. R


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All amounts remitted to the NBA by the Escrow Agent or NBATeams . . . shall be the exclusive property of the NBA, and theuse and/or disposition of all such amounts, including the alloca-

tion or distribution of such amounts to one or more NBATeams . . . shall be within the NBAs sole discretion.102

On its face, this section gives the league unilateral authority to determinethe final dimensions of the Escrow and tax system.103

In April 2000, the NBA Board of Governors used that authority toadopt its Escrow and Team Payment Distribution Plan.104 The leaguedivided the major part of its distribution system into two sectionsonefor the Escrow and one for the luxury tax. The Escrow money was to bedistributed primarily to teams that did not exceed the Penalty Threshold.If the tax is activated, teams that spend less than the 61.1% PenaltyThreshold receive a full 1/29th share of the money, those in the cliffbetween the 61.1% Penalty Threshold and 65% of league revenuesre-ceive a percentage of the money based on where their payrolls fall withinthat threshold, and those over the 65% cliff provision received 40% of thefull share in 20032004 and get nothing in 20042005.105 For luxury taxproceeds, teams below the Penalty Threshold receive a full 1/29th share,those in the cliff between 61.1% and 65% receive a partial share, andthose spending over 65% receive no distribution whatsoever.106

A sampling of the results of the Escrow and luxury tax distributionplan from the 20032004 season is detailed in Table 1.

102. Id. art. VII, 12(h)(1), at 13536.

103. The scope of this power was a source of disagreement between the NBA and theunion. In fact, the NBPA instituted an arbitration proceeding in August 2002 regardingthe leagues Distribution Plan, claiming that while the NBA could determine how theproceeds were distributed, it was required to do so within the spirit of the agreement. SeePeter May, On Rebate There is Debate, Boston Globe, Aug. 4, 2002, at C2 [hereinafterMay, On Rebate] (discussing NBPA claim that league was circumventing collectivebargaining agreement with Distribution Plan); see also infra Part III.B.1.

104. Pre-Hearing Brief of Natl Basketball Assn at 10, Natl Basketball Players Assnand Natl Basketball Assn (System Arbitrator 2002) (No. 02-01) (on file with the ColumbiaLaw Review).

105. See id. at 1112; Pre-Hearing Brief of the Natl Basketball Players Assn at 17 n.8,Natl Basketball Players Assn (No. 02-01) (on file with the Columbia Law Review). Also, the65% cliff maximum becomes 67% to reflect the collectively bargained designated20032004 Escrow Threshold of 57%. 1999 NBA CBA, supra note 29, art. VII, 12(c)(3), Rat 128.

106. Pre-Hearing Brief of Natl Basketball Players Assn at 11, Natl Basketball PlayersAssn (No. 02-01).


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TABLE 120032004 ESCROW AND TAX DISTRIBUTION PLAN107

Escrow Escrow Tax Tax1/29 Distribution Distribution 1/29 Distribution Distribution Total

Team Salary Escrow* (%) ($) Tax** (%) ($) ReceivedNew York $94.5 $5.7 40.0% $2.3 $5.3 0.0% NA $2.3

Portland $83.4 $5.7 40.0% $2.3 $5.3 0.0% NA $2.3

L.A. Lakers $63.0 $5.7 40.0% $2.3 $5.3 0.0% NA $2.3

Indiana $57.9 $5.7 40.0% $2.3 $5.3 23.5% $1.2 $3.5

Boston $56.2 $5.7 71.5% $4.1 $5.3 71.5% $3.8 $7.8

Phoenix $54.0 $5.7 100.0% $5.7 $5.3 100.0% $5.3 $11.0

L.A. Clippers $39.7 $5.7 100.0% $5.7 $5.3 100.0% $5.3 $11.0

*1/29 Escrow = 10% Escrow collected from players divided by number of teams.**1/29 Tax = Amount of luxury tax monies collected divided by number of teams.

As demonstrated in Table 1, teams under the Penalty Threshold, such asPhoenix and the Los Angeles Clippers, received a full $11 million share

of Escrow and luxury tax payouts. Those teams that fell within the cliffprovision (between the Penalty Threshold of 61.1% and 65%), such asIndiana and Boston, received somewhat less, while those above the cliffprovision (over 65%) received substantially less.108

D. The Effects of the NBA Model

Before evaluating the overall impact of the NBA Model, two majoreffects embedded in the taxation system must be brought to the fore.First, since the Penalty Threshold is not determined until after the sea-son, a Threat Effect occurs. Due to a lack of necessary information,teams can only predict the level at which their spending will be taxed. Inconjunction with the Threat Effect is a Marginal Tax Effect, whereby

the asymmetry of consequences for teams near the Penalty Threshold isfar greater than for those teams well above that threshold.

1. The Threat Effect. The Threat Effect is produced becausewhile the Escrow and Penalty Thresholds are based on the post-seasonBRI formula calculations, personnel decisions are made before and dur-ing the season. Therefore, teams cannot accurately forecast what thePenalty Threshold might be for the upcoming or current season.109 This

107. 20032004 Escrow & Tax Payout, supra note 36. All dollar amounts are in Rmillions and rounded to the nearest $100,000. The penalty threshold for 20032004 was$54.6 million. See Natl Basketball Players Assn, National Basketball Association/NationalBasketball Players Association, Schedule of Team Salaries Compared to the Team EscrowLimit for the 20032004 Salary Cap Year (June 2004) (on file with the Columbia Law

Review).108. Remember, too, that the Escrow distribution for all teams over the PenaltyThreshold drops to 40% in 20032004 and to 0% in 20042005. See supra textaccompanying note 105. R

109. Teams are not completely unable to predict the tax level, but any predictionwithin $1$2 million is unlikely. Furthermore, considering the actual tax rate of morethan 100%, a small miscalculation can have disastrous results. See infra Part II.D.2. An


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uncertainty, along with the grave economic consequences of underesti-mating the tax threshold,110 will cause teams that are concerned aboutpaying the tax to overestimate the potential threshold. Most teams must

build in a cushion between what they believe will be the tax thresholdand whatmightbe the tax threshold.111 This easily could result in teamsforfeiting the opportunity to use an extra $1$3 million for player salariesper season.

2. The Marginal Tax Effect. In general, teams sign athletes whomthey believe will help themin one way or anotherto increase teamrevenue or the value of the team in a way such that the cost of theplayer will not exceed that players output relative to team revenue orvalue.112 In other words, a team will sign a player whose marginal bene-fit exceeds or at least meets his marginal cost. This is not necessarilymeasured by the number of wins a player can generate, as it also mayinclude elements such as marketability and community ties that help gen-

erate ancillary revenue.113

While this conception may not account

example of the resulting conservatism was the Boston Celtics during the summer of 2003.Predicting that the Penalty Threshold would be somewhere between $50 and $51 million,the Celtics then-owner gave a directive not to spend past the teams current level, whichwas just below $50 million. See Steve Bulpett, Sources: No Luxury Tax for Green, BostonHerald, July 18, 2003, at 100, available at 2003 WL 3031662 (describing how ownersdirective prevented team from re-signing veteran Rodney Rogers). The Celtics estimatefell almost $3 million below the actual tax level of $52.9 million.

110. See infra Part II.D.2.

111. See, e.g., Norm Frauenheim, Suns Deal Palacio to Cavs, Lessens Effect of LuxuryTax, Ariz. Republic, Sept. 18, 2002, at C11, available at 2002 WL 101278899 (quotingNBAs Phoenix Suns General Manager and President Bryan Colangelo as saying luxury tax

is moving target); May, On Rebate, supra note 103 (stating that luxury taxs mere Rthreat has done more to pare costs than any other factor).

112. Value may come in forms other than money. Some teams are irrationalactors or can gain nontraditional benefits from overspending, so they permit themselvesto be relatively unaffected by the tax. See Dworkin & Posthuma, supra note 8, at 223 R(describing existence of some current professional sports team owners for whomprofitability is not ultimate goalrather, [o]wning a team may be more of a rich personshobby). Professor John Vrooman calls this the sportsman effect. John Vrooman, TheEconomics of American Sports Leagues, 47 Scot. J. Pol. Econ. 364, 386 (2000) (describinga sportsman as an owner [who] sacrifices franchise value for winning and expands thetalent of his club beyond its profit maximum); see also Weiler, supra note 42, at 187 R(noting that the combination of huge monetary and emotional rewards for an owner if histeam is at the top rather than in the middle of the league makes standard marginalrevenue productivity analysis fit somewhat awkwardly in the sports context).

113. An example of this might be the NFL, where all of the television money ispooled, a percentage of gate receipts are shared, and a smaller level of ticket sales is givento the visiting team. See Berry et al., supra note 2, at 6 (discussing NFLs sharing of gate Rreceipts); Staudohar, Playing for Dollars, supra note 15, at 60 (pointing out that NFL teams Rshare equally in television revenue). Therefore, the marginal revenue calculation for anNFL team might be different from that of an NBA team since winning may not bring thesame level of revenue to a team in the NFL as it might in the NBA.


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for every move made by team management,114 it certainly is the overrid-ing goal.115

Given these marginal benefit calculations, there are serious conse-

quences under the NBAs regulatory system for any team exceeding thePenalty Threshold. While teams are subject to a penalty of one dollar forevery dollar by which they exceed the Penalty Threshold and to forfeitureof significant Escrow and luxury tax payouts, it also happens that there isa penalty more disastrous for teams hardly breaching the Penalty Thresh-old than for the most egregious violators. To illustrate the point, take anexample of three teams, A, B, and C, each of which is trying to sign PlayerX to a one-year contract of $5 million. Team A is a chronic free spenderand is heading into the season far over any projected Penalty Thresholdat $75 million. Team B is near the mid-$50 million projected PenaltyThreshold. Team C, always skimping on player salaries, is far below thePenalty Threshold and, in fact, the Team Cap, but just above the mini-mum team salary permitted at $35 million.116 A look at the marginal tax

calculation of each team in determining the marginal benefit of signingPlayer X, as shown in Table 2, is revealing.

TABLE 2SIGNING PLAYER X(BASED ON $54.6 MILLION PENALTY THRESHOLD)117

Change inTotal Escrow Escrow & Total MarginalTeam Player Tax & Tax Tax Player Tax

Team Salary Salary Assessment Payout* Received** Cost*** Rate

A $75.0 $5.0 $5.0 $2.3 $0.0 $10.0 100.0%

B $55.0 $5.0 $5.0 $2.3 $8.7 $18.7 274.0%

C $35.0 $5.0 $0.0 $11.0 $0.0 $5.0 0.0%

*The Escrow & Tax Payout column is based on the Total Received numbers in Table 1.**The Change in Escrow & Tax Received column is the amount of Escrow & Tax payments

that each team forgoes for signing Player X.***The Total Player Cost column is the combination of the actual player cost, the taxassessment, and the escrow and tax payout dollars forfeited by the player signing.

114. See supra note 112. R115. See Quirk & Fort, Hard Ball, supra note 2, at 24, 8081 (The most that a general R

manager would be willing to pay a player is the added revenue that the player is expectedto bring to the team if he is signed.); Scully, Business of Baseball, supra note 8, at 151 R(declaring that if a player is paid a certain sum, it is because his performance andresultant fan following contributes that sum and more to the pockets of [the teamowner]). Scully develops four factors he describes as crucial to the determination ofplayer salaries. They are the overall quality of player performance; the weight or fractionof the players contribution to team performance; the experience of the player; and, thepopularity or recognizability of the player to the fans. Id. at 156. For another look at howmarginal revenue might be impacted by player success, see Zimbalist, May the Best Team

Win, supra note 2, at 51 (reporting that results of econometric analysis indicate that forMajor League Baseball teams, based on average ticket prices alone, one additional win wasworth average of $315,443 during period of 19852000).

116. The agreement stipulates that no team can have an aggregate salary of less than75% of the Team Cap. 1999 NBA CBA, supra note 29, art. VII, 2(b)(1), at 72. R

117. 20032004 Escrow & Tax Payout, supra note 36. All dollar amounts are in Rmillions and rounded to the nearest $100,000.


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Team As calculation is fairly straightforward. Since Team A will be aluxury tax payer regardless, upon signing Player X at $5 million for theupcoming season, Team A will have to pay $5 million in luxury taxes and

still receive only the minimum $2.3 million payout. Therefore, the margi-nal tax rate of signing Player X for Team A is 100%. Team Cs situation isalso relatively uncomplicated, as it faces no luxury tax threat. Whe

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