The New CBA: The Magic and the Luxury Tax

AP Photo/DayLifeWe are still waiting for the league to lift the lockout officially so teams can get back to work. Right now, while there is a tentative agreement, the two sides are hammering out the exact language that will govern the NBA for the next six or 10 years and making it presentable to the NBA’s board of governors and the player union members. There is still a little ways to go.

We are getting there, and the NBA is still very hopeful to see training camps open December 9 with the season kicking off on Christmas Day. Sunday, a summary of the principle points of the deal began leaking out and it sheds further light on what the parameters of this new NBA world look like.

Obviously each clause is going to have long-term and short-term implications. But knowing Dwight Howard’s uncertain future, every clause and article matters for the Magic. Everyone should at least know what the rules of free agency are going to be as we move forward, so I thought it would be a good idea to take each clause in turn and analyze what it will mean for the Magic and their future.

The first point in the memo is about the split of BRI. That came down to a 49-51 percent band but is essentially a 50-50 split. This is important for the players and fans, but largely means nothing to the fans. This split was one of the larger negotiating points of the lockout and determines how much of the total revenue the players actually get.

Fans can be quite numb to this number because it is such a large number. It is not worth analyzier because once the number is set, it means very little except for setting the amount for the salary cap. That hardly matters for the Magic right now.

What does matter is what we will talk about today: the luxury tax.

The owners eventually relented and maintained much of the constructs of the current system. There is a soft cap/luxury tax system. Teams can still spend as much money as they want, but the penalties for doing so will be much steeper.

According to the summary, the first two years of the deal, the 1-for-1 penalty will still exist as it has in the previous collective bargaining agreement. Beginning in the third year of the deal, the tax turns into an escalated tax. Teams would pay $1.50 for the first $5 million above the luxury tax line, $1.75 for every dollar between $5 and $10 million, $2.50 for every dollar between $10 and $15 million and $3.25 for every dollar between $15 and $20 million. For those teams inclined to keep spending, the tax rate raises by $0.50 for every dollar for every additional $5 million spent.

The hope with this arrangement was to make it so that teams could not simply outspend anyone else, thereby enabling more teams to compete for the league’s talent. It does not prevent teams from spending as much money as they want, but it certainly will deter them a bit.

The Magic are certainly already in salary cap hell with Gilbert Arenas and Hedo Turkoglu underperforming their contracts. Both those contracts will be on the books when the new luxury tax system kicks in.

As the roster stands now, the Magic will pay $74.8 million in salary. The salary cap line is likely to come in at $58-62 million like last year with the luxury tax line at $70 million. Orlando will be paying the tax next year, there is no doubt about that. With $75.7 million committed for 2012 — that includes both Arenas and Howard’s deals should they decide not to use their early termination option. Orlando likely is a repeat, habitual tax offender.

Reuters Pictures/DayLifeIt is going to cost some money to keep Howard and the Magic are going to use every exception and trick available to them. And as a taxpayer, there is not going to be much — the new deal offers Orlando only the taxpayer mid-level exception which is a $3 million deal in the first year with a maximum length of three years with three percent increases. That is not a whole lot to offer. Otis Smith is going to have to get tricky with trades to get whatever it is the Magic need.

The reality is that Orlando is going to be a taxpayer for a while if it is going to keep Dwight Howard. And it has to plan as if it will. Even if the Magic lose Howard and Arenas does not exercise his early termination option, the Magic will be over the cap and flirting with the luxury tax. Orlando is not worrying about paying the 90 percent of the salary cap required of all teams any time soon.

The bright light — a dim one at that — is that if Howard does not resign and the Magic wait out Arenas and Turkoglu’s deal, the Magic right now have $41.3 million in salary committed in 2014. So, theoretically, if the team spends its money right, the franchise would be ready to rebound with (likely) a decent draft pick and a ton of cap room in 2014.

But can you wait two more years? And what would the Magic do to reach the 90 percent minimum threshhold in the meantime? Those are complete mysteries. Mysteries that cannot be resolved until Dwight Howard’s future is fixed. If there is a back-up plan, it appears it is to make 2014 the year the Magic become players in the free agent market once again.

I don’t think Rich DeVos can wait though. DeVos finally began dipping into the luxury tax because he wants his team to win a championship before he dies. That is why DeVos was willing to approve the spending splurge after the Finals run in 2009 and why the Gilbert Arenas and Hedo Turkoglu deals got the OK. I don’t believe DeVos will be shy with his money in this new landscape. Not so long as Dwight Howard is around.

If Howard is on the team, DeVos and the team will continue to do what it takes to win. The luxury tax will not matter as much in the short-term.

Philip Rossman-Reich

About Philip Rossman-Reich

Philip Rossman-Reich is the managing editor for Crossover Chronicles and Orlando Magic Daily. You can follow him on twitter @OMagicDaily

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