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Flex tax won't please everybody, but it's best cap-tax solution

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Deputy commish Silver makes it sound simple: a league where all teams can compete and profit. (Getty Images)  
Deputy commish Silver makes it sound simple: a league where all teams can compete and profit. (Getty Images)  

Listen to the rhetoric, and you would think the NBA and its players are at opposite ends of the Earth in discussions to restore competitive balance without trampling on precious buzz words that the union holds dear.

That's what rhetoric is for, though: to make things seem like something they are not.

The league would have us believe that the competitive imbalance it suffers is as simple as the Lakers' $90 million payroll vs. the Kings' $45 million payroll. The players respond that spending has little or nothing to do with success, and that teams should make better decisions.

They're both wrong. Surprised?

Just as I've explained that there's a middle ground on basketball-related income -- it's between 51 and 52 percent for the players, and should have been agreed to already -- so, too, is there a fairly simple way to solve the bargaining impasse over how to more fairly distribute team payrolls to mute the competitive advantage of big-spending teams.

I can't take credit for the concept, as sources indicate that the two bargaining committees have discussed it already -- and in fact, have indicated a willingness to explore it as a solution. I'll take credit for the name, though, for as far as I know, nobody has yet referred to the key to ending the lockout using this term: the "flex tax."

It's a magical name for a sublimely simple compromise -- an intersection of the owners' bid to flatten payroll disparity and the players' desire to maintain some degree of choice in spending rather than have that choice imposed on teams by the system.

First, we must quickly review how we got here and why each side has no more excuses now that federal mediator George Cohen is involved -- interviewing both sides separately Monday and then overseeing a bargaining session Tuesday with the potential for more lost games around the corner.

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As we can all hear deputy commissioner Adam Silver saying in our sleep, the NBA came into this negotiation with two goals in mind: to create a system in which all 30 teams can compete for a championship and, if well managed, have the opportunity to make a profit. With the National Basketball Players Association having agreed to reduce its share of BRI to 53 percent from 57 percent, the owners already have achieved the lion's share of their economic goal. Based on the infamous letter that seven super agents sent to their clients recently -- and corroborating information from multiple sources -- the players appear prepared to go as low as 52 percent. Such a percentage would represent a transfer of $1.3 billion from players to owners over a six-year deal -- more than $200 million of the $300 million the league says it is losing on an annual basis.

But the owners remain committed to addressing not only their aggregate losses, but also a system that they believe is tilted too much in favor of big-market, big-spending teams. Initially, they wanted an NFL-style hard salary cap; the players rejected it. They shifted gears to an NHL-style flex cap, with a spending band for each team; the players rejected it and suggested a more punitive luxury tax instead. So the owners obliged, proposing an increase in the dollar-for-dollar tax to $1.75 for the first $5 million over the tax threshold, with 50 cents added for each subsequent $5 million. Under such a system, the Lakers -- with a $90.4 million payroll -- would've paid $50 million in tax as opposed to $20 million under the old system.

The problem is, neither the Lakers nor anybody else would pay such an exorbitant amount. In other words, assuming Jerry Buss was willing to pay not a penny more than the $110 million he spent last season in payroll and taxes, the Lakers' payroll would need to be reduced to $80 million to avoid exceeding that expenditure. So basically, Derek Fisher -- the union president himself -- would no longer be a Laker.

There are several problems with all of this:

 The tax system the owners have proposed is far too punitive, and thus would not generate much, if any, new tax revenues because teams at the high end would simply retrench and not spend above the new, more punitive levels.

 The players continue to say that a hard cap, or something else that acts like one, would compress salaries. This is incorrect and impossible under a system that guarantees the players a certain percentage of revenues.

 While it carries a disincentive for big-spending teams to spend, the owners' tax proposal also doesn't incentivize the outliers at the bottom of the payroll spectrum to spend more.

 It also doesn't address the problem already inherent in the previous tax system: the so-called "cliff" or hard-cap characteristic of the tax threshold.

Let's attack these items in reverse.

The tax threshold last season was $70.3 million. Of the league's 30 teams, 19 wound up within approximately $5 million of that number, plus or minus -- 8 percent in either direction. There were three outliers at the top that exceeded the tax by at least $16 million (Lakers, Mavericks and Magic) and eight at the bottom that came in at least $11 million below it.

Eight teams -- the Hawks, Grizzlies, Spurs, Raptors, Bucks, Warriors, 76ers and Hornets -- came in within $2 million or less of the tax. Why? For those teams, the cost of adding one more player presented the double-whammy of not only having to pay luxury tax, but also incurring the cost of not receiving money from tax-paying teams.

The Hawks, who pressed right up against the tax threshold with their $70.25 million payroll, are a good example. Let's say general manager Rick Sund thought adding one more $2.5 million player would've helped the team's chances of advancing in the playoffs. That player would've cost $2.5 million, plus the dollar-for-dollar luxury tax for a total cost of $5 million. But that's not all. By going from being a tax receiver to a tax payer, the Hawks would've foregone the approximately $2.5 million in luxury tax payments they would've received by staying under the threshold. So the total cost of that $2.5 million player would've been three times that amount -- $7.5 million. That's why the Hawks' payroll ended up just below the tax.

How do you address this? If you're an experienced, even-handed mediator like Cohen, you would fix it so easily that you would wonder why your valuable time and expertise were even required in the first place.

First, you raise the tax line by about $2 million and make the initial penalty slightly, but not dramatically more punitive -- say, $1.25 per dollar for the first $5 million. This would allow teams like the Trail Blazers and Rockets (who were slightly over the tax last season) and the aforementioned teams from the Hawks to the Hornets (who were within $5 million of the tax) to wade in and make temporary improvements to their teams without getting clobbered with an ultra-punitive tax for adding the equivalent of one potential difference-maker.

A $1.50-per-dollar tax on the next $5 million (up to $10 million over), a $1.75-per-dollar tax on the next $5 million (up to $15 million over), and $2 above that would address the outliers at the top -- the Lakers, Mavericks, Magic, and to a lesser degree, the Celtics and Jazz. Without boring you with the math, the effect would be this: the top-spending teams likely would reduce payroll by $2 million-$3 million each, but their individual tax payments would go up by a commensurate amount -- so that the total expenditure would remain the same but millions would shift to lower-spending teams in the form of payroll increases and tax receipts.

To use the Lakers as the example: L.A. had a payroll of $90.4 million last season and paid $20 million in tax. Under the flex-tax described above, in order to spend the same $110 million, the Lakers would reduce payroll by $3 million, but their tax bill would increase by $2.5 million -- a $5.5 million transfer from the top-spending team to the have-nots.

Of course, these payroll and tax figures are based on the players' previous guarantee of 57 percent. Aggregate spending on players would decline league-wide by about $200 million based on the players accepting a 52 percent guarantee -- about $7 million per team. So the new, relatively higher tax threshold would have to be adjusted for the new BRI split. It is for people much smarter than me to pinpoint that magic number based on the players' reduced guarantee of BRI.

But a welcome side effect of a relatively higher tax threshold would be that the slew of teams that deliberately stayed within striking distance of the previous tax line would be incentivized to spend up to the new one. Several of these teams (Memphis, Milwaukee, New Orleans) are in small markets and would be helped by spending some of the money the big boys are not. And if a team felt that adding a player would make a difference, they would be far more inclined to wade into the tax at a $1.25-per-dollar penalty rather than at the league's proposed $1.75 for the first $5 million.

But the key to making this work and smoothing out the luxury-tax cliff is changing the distribution of luxury tax payments. Under the old way, each team below the tax received 1/30th of the amount contributed by the tax payers. Last season, seven teams paid about $71 million in tax, which was distributed to the other 23 teams at $2.4 million each. The other $16 million or so went into the revenue-sharing pool.

Such a method couldn't run any more counter to the goal of competitive balance, especially when you consider that the Knicks, Heat, Bulls and Warriors -- teams in four of the NBA's most glamorous markets -- all received luxury tax money last season. The total tax payments -- which would rise even as the top spenders' payrolls fell under a properly calibrated flex tax -- must be distributed 100 percent based on financial need, not payroll.

This is one way to help the outliers at the bottom, but is hardly the only fix that's needed.

Of the eight teams that spent $59 million or less on payroll, several had sound reasons for doing so. The Nets are moving to Brooklyn in 2012, after which they are expected to become one of the top spending teams in the league. The Bulls are being responsible in leaving room to re-sign superstar Derrick Rose. The Wizards retrenched from the Gilbert Arenas fiasco and expertly dumped salary as part of a calculated rebuilding plan. The Cavs lost LeBron ... you get the idea. To an extent, teams must have the ability to shed payroll as they see fit, either for rebuilding purposes, to clear space to retain their own core players or chase free agents, or to deal with unforeseen economic shocks. When they were having success, the Pistons and Kings spent money. Presumably, they will spend money again.

But in order for the league to fully achieve a flattening of the payroll disparity, the teams at the bottom must be incentivized to spend -- through properly allocated tax money and massively enhanced revenue sharing. But some of them, indeed, need to be forced to spend. The previous minimum payroll (75 percent of the cap, which is exactly where Sacramento came in) has to be increased to at least 85 percent. (You heard me, Donald Sterling.) In the CBA that ended the NFL lockout, the cash minimum for team payroll is 89 percent of the cap.

As the league and union -- each intransigent in its own way -- convene under Cohen's supervision for a crucial bargaining session Tuesday, I don't mean to suggest that a flex tax like the one I'm proposing is the whole ball of wax that will lead to a deal. But the system governing team payrolls clearly is the biggest issue standing in the way -- the new elephant in the room, a beast that Cohen will somehow have to tame.

The issue of player contract length will be an enormous sticking point. So will the BRI split, now that the gap between the two sides has grown with two weeks of canceled games and will only grow wider with more collateral damage.

But if Cohen, the ultimate dealmaker according to legal sources who have dealt with him, can build a bridge on the cap-and-tax issues, then agreement on the other problems can and will follow. I don't have all the answers, but I do have the answer to this question: Are there any more excuses for the NBA and its players union to avoid compromise and extend this lockout?

The answer to that question is no.


Before joining CBSSports.com, Ken Berger covered the NBA for Newsday. The Long Island, N.Y., native has also worked for the Associated Press and can be seen on SportsNet New York. Catch Ken every Saturday, when he hosts Eye on Basketball from 6-8 p.m. ET on cbssportsradio.com
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