Luxury tax looms as big obstacle to deal

It should not be a surprise that significant progress was made on the so-called system issues during Wednesday’s marathon negotiating session.

Last week, the owners and players’ union were pushing through what one source in the talks described as “dozens” of such nitty-gritty issues before a bizarre turn of events torpedoed their final session with a federal mediator. The two sides had either reached a compromise or moved toward one on all sorts of things — rules for restricted free agency, salary-matching requirements for trades, Bird Rights limitations, the mid-level exception and other seemingly small details that add up to a broader agreement on the cap and tax system.

You know what happened next: Trail Blazers owner Paul Allen showed up with his death stare; the league demanded that the players agree to a 50-50 split of basketball-related income before negotiating further on the system; Cavaliers owner Dan Gilbert urged union executive director Billy Hunter to “trust [his] gut”; and the union delivered the lockout’s angriest press conference.

But they got back it again Wednesday, chipping away at those system issues while tabling the revenue split for another day — the same negotiating strategy the players pitched last week, only to have the league rebuff them. Sources involved in the latest session have been mum on exactly what kind of progress happened — where the two sides found common ground and where they still have work to do.

Even so, I feel comfortable saying this: The luxury tax is the biggest obstacle to a deal, at least among the system issues. And even more specific: The league’s proposal to triple and quadruple tax penalties for teams that pay the tax more than twice in any five-season span remains a nonstarter for the union.

As SI.com detailed two weeks ago, the luxury-tax system that the league proposed before talks broke down earlier this month started with a penalty of $1.75 per $1 over a threshold and escalated by 50 cents per dollar in $5 million bands. That alone would be a huge step up from the old system, which taxed teams at a dollar-for-dollar ratio regardless of how far over the tax they went. Under the old system, the Lakers will pay about $20 million in tax penalties based on last season’s payroll; they’d have to fork over about $50 million under the NBA’s proposal.

The 2010-11 season will be the fourth consecutive year in which the Lakers will have paid the tax. Dallas had paid the tax for six straight seasons, the Celtics the last four. The Knicks paid a tax in each of the five seasons before 2010-11, the Cavaliers for the three seasons before last. The league has proposed jacking up the penalties for such annual taxpayers, so that teams paying for the third time in five seasons would have their bill tripled. Teams that pay four times in five seasons would face a quadruple penalty.

Again: Sources are mum about precisely where the league’s tax proposal stands today. Sources close to the talks indicated last Thursday that the league had softened the tax ratios, but that the multiplying penalties for routine payers remained. A source close to the talks tells me that remains true today–that the league has stood by the multiplied penalties for teams that pay the tax three or more times during a five-year span.

The union believes, with some justification, that such penalties will carry many of the same effects of a hard cap. Teams faced with tax bills in one season will have to plan to get under the tax in the future, meaning they’d limit guaranteed deals to stars and players on their rookie contracts. The middle class would live with nonguaranteed deals.

There is a middle ground for everything. The two sides know where the middle ground is on the revenue split, and they have found it — or approached it — on lots of other issues. They’ll find it on contract lengths, raise amounts and other stuff. They have to.

But can they find one on this issue? The union has been steadfast that teams should be able to pay the tax every season if they wish, without facing additional penalties. The league has been steadfast that payrolls at the high end must come down, and that a punitive tax is one way to get it.

Who will budge?