EXCLUSIVE: Details of owners’ tax proposal

Many raised their eyebrows Tuesday morning when a few outlets, including The New York Times, Newsday and CBSSports.com, reported that the NBA’s proposed luxury tax could in theory penalize teams as much as $8 for every dollar they spend on player salaries over certain thresholds.

The old system taxed such teams only on a dollar-for-dollar basis, meaning if a team exceeded the tax threshold by $20 million, as the Lakers did last season, it had to pay an additional $20 million in penalties. On top of that, teams that came in even a single dollar over the threshold lost out on a chunk of the tax proceeds the NBA distributes to every team that doesn’t pay tax.

The league’s reported tax proposal was restrictive enough for the players on Monday to characterize it as essentially a hard cap. If you’re going to tax teams at an 8-to-1 ratio, the argument goes, big-money teams will stop spending so much, and when they do, players will have lost a key source of free-agency leverage.

The devil, of course, is in the details, and a source close to the labor negotiations explained to SI.com just how the owners’ tax proposal would work. (An NBA spokesman declined a request to comment or verify the details of the tax proposal, saying the league will not publicly discuss the specifics of the negotiations.)

• The tax would start at $1.75 in penalty payments for every dollar a team is over the tax threshold. Say goodbye to the dollar-for-dollar hit, which was the maximum penalty a team could pay under the old system.

• That $1.75-to-1 ratio would last for the first $5 million a team is over the tax line. For every $5 million increment after that, the penalty would jump by 50 cents per dollar. So, for spending over the threshold between $5 million and $10 million, the penalty would be $2.25-to-1. For spending between $10 million and $15 million, it would be $2.75-to-1. And so on.

• The tax threshold would begin near where it did last season, when the salary cap was $58 million and teams crossed into luxury-tax territory at the $70 million mark.

Let’s use the Lakers as an example, since they spent almost exactly $20 million above the tax line last season. Under the old system, they would (and eventually will) pay $20 million in penalties, and lose out on the slice of money every non-taxpaying team receives. We don’t know what that slice will be for the 2010-11 season, but it was $3.7 million the year before, and it won’t change much. (To learn how that is calculated, go here.) Total losses under the old system were $23.7 million.

Under the new system, the Lakers’ tax penalty would be close to $54 million based on these calculations:

$5 million x $1.75 = $8.75 million

$5 million x $2.25 = $11.25 million

$5 million x $2.75 = $13.75 million

$5 million x $3.25 = $16.25 million

Add the $3.7 million, and the Lakers’ taxes/losses end up at $53.7 million. That’s a lot. It might not be enough on its own to keep the Lakers from spending, but as SI.com has reported, the league has also proposed rules that would prohibit teams over the tax from using the mid-level exception, Bird Rights and other mechanisms that allow big spenders to spend more.

While the Lakers, who are about to enter into a massive new local TV deal, may spend right through the financial hits, teams that approached the old tax line a bit more cautiously might look at this one like a red-hot poker.

And the poker gets even hotter. As Yahoo! Sports’ Adrian Wojnarowski reported late Monday, the proposal would penalize teams that pay the tax in more than two seasons during any five-season stretch. That penalty is harsh, according to a source familiar with the matter. If a team has gotten into tax territory, say, twice over the preceding four seasons and finds itself over the tax line a third time, the penalty triples in each spending range.  In other words, that $1.75-to-1 ratio that kicks off the tax in Year 1 would jump to $5.25-to-1 for a team paying the tax a third time. Do the math, and you could get to 10-to-1 or higher pretty quickly. Whether you’re the Lakers or the Knicks or the Bill Gates Billionaires (based in Seattle!), you are going to blink at paying $100 million in tax penalties alone. Fine, maybe Gates wouldn’t blink, but he doesn’t own an NBA team.

The players proposed their own revised tax plan, but it was far less restrictive, as you’d expect, and the union has opposed most moves to take exceptions like the mid-level and Bird Rights away from all or most taxpaying teams. The union’s proposal would have started with a $1.25-to-1 ratio and escalated much more slowly, and to a much lower ceiling, than the league’s proposal, according to a source. It’s unclear how different it really would have been from the tax system the league just had.

Look at these two plans, and you can see the “gulf” commissioner David Stern and union chief Billy Hunter talked about on that New York sidewalk Monday night.