Philadelphia (Feb. 19, 2003) -- A looming luxury tax that could have a major impact on the NBA is offering teams an incentive to curb their payroll spending, according to a report by the Philadelphia Inquirer.

While the league doesn't yet have a luxury tax in place, such a levy is expected to take effect next season, and it could cost teams affected big bucks, the Philadelphia Inquirer reported. The league currently has what’s called a "soft" salary cap that is full of exceptions. According to the report, this season’s cap is $40.25 million, and every team in the league has a payroll in excess of that amount. But, under collective-bargaining agreement that now governs the NBA, players are entitled to no more than 55 percent of the league's basketball-related income.

Owners have two ways to enforce the limit: the escrow tax, under which each player has had 10 percent of his salary withheld and put in an escrow fund. At the end of each season, a determination is made about how much of that money has to go to the owners to keep the players at 55 percent. The second is the luxury tax, which is supposed to take effect when the escrow tax no longer produces enough to set things right. At that point, any team with a payroll in excess of 61.1 percent of its share of the league's total basketball-related income becomes subject to the tax. The tax will almost surely take effect next season.

If the tax does apply next season, the report said, it will penalize teams with payrolls exceeding a threshold number estimated at $52 million. And unlike the salary cap, this limit has no exceptions; total payroll is all that matters, the report said. According to the article, eight teams have payrolls of $60 million or more. When it does take effect, teams will have to pay a dollar to a central league fund for every dollar by which their payroll exceeds the tax threshold. Some of the tax money will, in turn, be redistributed to individual teams, but tax-paying clubs will be ineligible to receive those payments. So a dollar in excess spending will have a net cost well in excess of two dollars.

-- Electronic Accountant Newswire Staff

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