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The New CBA: Luxury-Tax Distribution

John Rohde Published: December 9, 2011

Today’s topic in the NBA’s new collective bargaining agreement:


2005: Teams that did not pay tax each received 1/30th of the total tax fund. Taxpaying teams forfeited their tax distribution and their money was used for “league purposes” such as the revenue-sharing program.

2011: No more than 50 percent of the tax funds can go exclusively to teams that did not pay tax.

Definition: The money collected from escrow and luxury tax may be distributed to teams or used for league purposes, subject to certain rules. Note that in some cases, taxpaying teams receive more than enough money to offset the luxury tax they pay. The distribution rules are different for escrow money and tax money. Escrow: Some or all of the escrow money may be reserved for league purposes. This is likely to be a small percentage of the total escrow amount, but there is no cap on the amount that is used for league purposes. The league could, at their discretion, use all of it. Tax money: Teams under the tax level receive a full share (1/30) of the tax money. (Note that if the league expands, the fraction changes.) Any remaining tax money that is distributed to teams must go to all teams in equal shares.

Winners: Economical owners. A team that previously was $1 under the tax line received a full tax distribution (about $2.4 million in 2011), but a team $1 over the tax line received nothing. This “tax cliff” no longer exists. The new system softens the blow for teams that exceed the tax line by just a little. Teams near the tax line would have pay the amount in tax, but could still be eligible for a payout to offset their tax bill. The new agreement stipulates that no more than 50 percent of the tax funds can go exclusively to teams that did not pay tax, but does not specify what happens to the other 50 percent. It is possible the remaining tax money will be distributed to all teams in equal shares, but it’s also possible the NBA will reserve this money for “league purposes.”


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