When Jazz owner Larry H. Miller uttered these words a couple of months ago — "We won't pay taxes. We can't. There are no asterisks." — shivers were felt up and down the Wasatch Front.
Today, goose bumps are popping up in most NBA markets.
The looming threat of a luxury tax has chilled excessive, arguably irresponsible spending on player payroll by a plurality of franchise owners — not just the one from Utah.
"There are a lot of other teams that aren't going over the luxury tax (threshold)," said Kevin O'Connor, the Jazz's vice president of basketball operations. "Their owners just haven't come out and said, 'Hey, we're not going over it.'
"Larry's been honest about it."
Honesty, more often than not, is the best policy.
Candor, though, can come with a price — especially when its subject matter is as misunderstood as this economic issue seems to be.
Simply stated, the new luxury tax — a function of the current Collective Bargaining Agreement between the NBA and its Players Association — will be levied, starting next summer and based on payroll during the coming season, on teams that overspend.
But there's much more to it than that.
Salary cap. Escrow System. Luxury tax.
You don't have to be Alan Greenspan to figure it all out, but a degree from the Wharton School wouldn't hurt.
The salary cap
In sum, the long-standing salary cap is not much of a cap at all.
Teams go over it all the time.
The cap does place a limit ($42.5 million in 2001-2002) on total salaries each team is supposed to pay its players during a given season, and it does handcuff the ability of front-office personnel to acquire big-ticket free agents
without a significant trickle-down effect on its roster.
But cap rules permit teams to re-sign their own players for higher salaries than other teams often are permitted to pay. And there are so many exceptions — first-round draft choice, minimum salary, million dollar, mid-level, disabled player, traded player, Bird, Early Bird, Non-Bird, Tweety Bird — that actual payroll for all but a few teams regularly exceeds the cap amount.
For example, the mid-level exception (about $4.5 million) can be used to sign one or more free agents even if a team is over the cap.
Once an over-the-cap team has used all of its exceptions, however, its hands are tied — which is why some capped-out teams are still able to acquire various players, but others cannot.
If a team is not over the cap, it can acquire players using its salary 'room' up to the cap — but it cannot use certain exceptions, including the mid-level.
Virtually every team that truly is competitive in the NBA is over the cap. The Jazz are and will be as long as highly paid stars Karl Malone and John Stockton continue to play.
The luxury tax, meanwhile, is another matter altogether.
The excrow system
As most NBA in-the-know types would agree, the luxury tax amounts to a virtual hard cap on player payroll. It was agreed upon in 1999, when the league, owners and locked-out players were searching for a way to settle a labor dispute that disrupted the '98-99 season.
Before the luxury tax and its implications can be fully understood, though, one must first understand the Escrow System, which is in effect for at least the next three seasons.
It, too, is part of the '99 lockout settlement. Its essential purpose: to assure players that the owners are not making an inordinate income relative to salaries.
The players didn't feel they were overpaid, which is why they agreed to the Escrow System that seems to be coming back to bite them now.
Most owners — attempting to ensure economic health for a league whose spending seemingly had grown out of control, and hoping to discourage fellow owners who can afford to overpay players from doing so — felt players were overpaid.
The way the Escrow System will be utilized this season, those owners argue, is proving that now.
Based on levels established in the Collective Bargaining Agreement, the owners soon will have some cash coming back to them. For teams not over the luxury tax threshold, it could total more than $6 million each — something that surely won't sit well with the multi-millionaires who play a game for a living.
The Escrow System, informally referenced by some as an "excise tax," works like this: If in any one season, total player salaries and benefits exceed 55 percent of Basketball Related Income (which includes everything from ticket sales to broadcast rights fees, marketing proceeds and net profits in concession sales) — and projections suggest they will in the coming season — then individual player salaries will be reduced to the point that they collectively equal that '55 percent of Basketball Related Income' figure.
One caveat: The total reduction in player salaries cannot exceed 10 percent.
According to the CBA, "amounts will be withheld from individual players pro rata based on each player's salary." In other words, those who make more will pay more — up to 10 percent of their individual salary.
Another caveat: The Players Association has the right to propose an alternative method for calculating individual withholding.
Bottom line: No one should go broke, but the NBA's 400 or so players can count on returning somewhere between $150 million and $185 million in total salary next year. Individually, the hit might range from less than $33,000 (for players making the rookie minimum of nearly $333,000) to more than $1.5 million (for the league's highest-paid players, who make in excess of $15 million per season).
The luxury tax
That brings us to . . . the luxury tax, a k a the Escrow Backup Tax, which is designed to discourage reckless spending by owners.
If total salaries and benefits exceed 55 percent of Basketball Related Income by more than 10 percent of total salaries and benefits — again, projections suggest that will be the case in the coming season — then any team whose total player payroll exceeds a specified level must pay a tax of $1 for every $1 it goes above that level.
(When calculating team payroll for luxury tax purposes, veteran players earning minimum-scale salaries on a one-year contract will count for no more than $590,850 in the coming season.)
It is anticipated that the dollar-for-dollar threshold will fall between $53 million and $55 million.
Say it winds up at $54.4 million, and a team's spending is calculated at $60 million; that team then would pay a $5.6 million tax.
Say a team already at the luxury threshold in player payroll used its entire mid-level exception (again, about $4.5 million) to pay a newly signed free agent. In effect, that player would wind up costing the club at least $9 million — $4.5 million in salary, and another $4.5 million in taxes.
But there's more.
Teams over the luxury threshold must not only pay the dollar-for-dollar tax, but they also forfeit the right to share in distribution of total luxury taxes collected (which could be more than $1 million per team). Furthermore, they forfeit the right to a full share in distribution of the player excise tax — money which will be held in escrow until next summer, when actual tax amounts due are determined.
The fallout
The fear of paying the tax and missing out on the windfall is altering the way NBA franchises do business.
Phoenix, for example, recently trimmed payroll by more than $1 million by trading Clifford Robinson to Detroit for journeymen Jud Buechler and John Wallace. The move was made, in part, to help the Suns avoid the luxury tax.
Even Jerry Buss, owner of the defending-champion Los Angeles Lakers and a generous spender in days gone by, reportedly has made it clear he does not plan to pay. The Lakers showed it, too, by allowing starting power forward Horace Grant to depart for Orlando, then making little noise of their own in the free-agent market, acquiring only lower-priced commodities such as Samaki Walker and Mitch Richmond.
Sacramento's Chris Webber, probably this offseason's biggest-name free agent, wasn't exactly showered with enticing offers, in part because tax-fearing franchises shied away. He wound up staying with the Kings, which used the Bird exception to pay him more than other teams could have — evidence that more and more high-profile players may be reluctant to leave their own teams.
Still others have been hesitant to re-sign their own overpaid free agents, making them available to teams willing and able to take on the salary: Houston allowing legendary center Hakeem Olajuwon to leave for Toronto is a prime example.
Many teams simply refuse to spend all of their mid-level exception money on one free agent. More than perhaps any time previously, it seems, those doling the dough are scared to make mistakes by signing marginal players for more money and longer terms than fiscal responsibility suggests they should.
The cost-conscious behavior will even filter down to training camp: Fewer lower-level players will be invited due to fear they could sustain a serious injury and wind up on the payroll (injured players cannot be released outright), thus counting toward the luxury tax threshold.
"Now we've got to feel pretty good about everything. We're not just adding camp guys," said David Fredman, the Jazz's director of scouting.
Not everyone will be pinched by the tax. Outspoken Dallas Mavericks owner Mark Cuban, for one, has said the tariff doesn't bother him. The New York Knicks seem destined to cough up some cash, too.
Yet even owners with pockets as deep as Portland's Paul Allen (read: Microsoft) are looking for ways to slow spending.
"The luxury tax," O'Connor said, "is trying to put everyone on an equal playing field, so that people couldn't 'buy teams.' "
As for Miller, he has made it clear he cannot, and will not, be one of those people.
"We're just not going over the luxury tax," O'Connor said, "and Larry (Miller) feels he can run a business that way."
The other option: being run out of business.
Still, Jazz spending has not screeched to a complete halt because of the tax threat.
"I think we're focusing on the wrong thing with the luxury tax," O'Connor said. "What we really need to focus on is that we're gonna be the ninth or 10th highest-paid payroll in the league."
Last month, Utah did sign Orlando Magic free agent center-forward John Amaechi to a multi-year deal that starts at about $2 million next season. Next month, the Jazz are expected to re-sign veteran guard Stockton.
To do so, however, they will not put themselves over the anticipated luxury tax threshold.
They won't. They can't. There are no asterisks.
E-mail: tbuckley@desnews.com