Jerry Reinsdorf said he’d pay the tax for a winner. The penalty for paying the tax has changed considerably since he made that statement, and this team wasn’t a winner this season.
There are a few new reasons why the Bulls may suddenly get squeamish about paying the luxury tax beyond their history of never having actually paid it (not once) despite a repeated mantra of being willing to pay it for a winner.
There are new basketball reasons to avoid the tax. Teams over the tax apron (4 million over the tax limit) can no longer do sign and trades or use the MLE and have tighter salary matching rules in which to operate. Effectively, it becomes much more difficult to add additional salary once over the tax outside of extending your own players.
Even that becomes a tiny bit more difficult with the Gilbert Arenas exception not covering teams over the tax apron because those teams can’t match a first year salary at the MLE.
There’s also a new revenue sharing number based on team revenues where every team puts in a percentage of its revenue into the pot and then each team pulls out the league average. You can read more about the plan here. The Bulls are obviously going to be hit considerably by the revenue sharing system and will drop profits considerably because of it. There is protection in the plan, so that they can’t lose more than half their profit to revenue sharing, but that’s likely not a whole lot of protection from their perspective if their profits are cut in half.
Revenue sharing is great for the league, but let’s be honest, it’s terrible for the Chicago Bulls and is designed so a team like the Bulls cannot outspend other teams. Something which they haven’t done historically anyway, but fans expected them to do so for the first time over the next few seasons. If they do, they will no longer be sacrificing the deep end of their swimming pool of cash, but could sacrifice the whole pool. The new plan doesn’t fully phase in until the 2013-14 season, and I haven’t found details on the specifics of the impact next season.
In addition to the Bulls losing money to revenue sharing and player acquisition limits due to the tax, the tax has simply become much more punitive. This will be the last season the tax is a dollar per dollar for teams that are over, but that doesn’t give the Bulls much of a free pass, because if they pay the tax in three of the next four years they’ll get hit by a repeat offender penalty.
A team that’s 15 million over the tax for example would owe 28.75 million if they weren’t a repeat offender and 43.75 million if they were compared to 15 million in the current system. Even if the Bulls were to stay five million into the tax (the lowest level) for the next four years, they would owe 12.5 million in tax in the final year for being a repeat offender and 7.5 million in the other years.
That means for that MLE type player (your Kyle Korver or Ronnie Brewer), you’re effectively paying him 12.5-17.5 million depending if you are a repeat offender [5 million to his salary + 7.5 to 12.5 million in tax]. The price goes up to 13.75 to 18.75 for the second extra MLE guy you add, and then jumps to an absurdly high 17.5 to 22.5 million for the third guy. In short, the Bulls aren’t likely to pay that much for those guys.
If the Bulls were scared of the dollar per dollar tax without revenue sharing, how do you think they feel about becoming repeat tax offenders now? I’d say that there’s no way in hell they let that happen, and that the Bulls will live only in the first tax threshold and only so much that they never achieve repeat offender status. What that means for Chicago is that while some tax may still be paid, the Bulls aren’t going to dig deep or often into it. The cost to dig deep went up by a factor of three to four while the teams revenues are about to get rocked by revenue sharing.
Finally, with the Bulls abbreviated playoff run and a lockout shortened season this year likely cut profits to 50% or less of what they were last season. The numbers for the 2010-11 campaign aren’t out by Forbes yet (the 2011 article use 2009-10 numbers for operating income/revenue), but my estimate is the Bulls made about 70-75 million with the ECF playoff run.
With eight less regular season home games, three less preseason games (season ticket holders are forced to buy em), and six to ten less ultra high revenue playoff games than expected combined with some post lockout fan apathy, Chicago’s profits likely fell to around 35 million this season.
Throw all of these things together, and I feel a bit more sympathy towards Chicago ownership for not paying the tax if they choose to avoid it. Jerry Reinsdorf still has fiduciary responsibility to the owners of the Bulls (he doesn’t own them outright even if we pretend he does for ease of use in writing), and the Bulls are already going to lose a ton of profit under this new system. The benefits of paying the tax to enhance your odds of winning and making even more money no longer apply. The benefit is simply too small for any rationale that paying the tax would increase long term profits by bringing titles to Chicago because the incremental odds of winning through spending are so much lower now.
When you combine all these changes with the new Derrick Rose rule which enhanced Rose’s salary by an additional three to four million per season, the Bulls franchise got absolutely rocked by this new CBA for the third time in a row [new FA rules allowing home teams to offer more an a max salary likely stopped the Bulls from landing Duncan in 99, the one and done rule stopped them from landing durant in 2005, and the new tax rules strangle their flexibility in 2011]. New team has had the new CBA directly destroy their interests more often than Chicago.
In short, under the previous CBA, paying the tax was likely a good business decision for Chicago. Under this CBA its not. I would suspect Bulls ownership would give up some profit for a title, but with the ante being upped so much its much harder to justify. The Bulls won’t pay the tax next year. At least that’s my prediction. Forget about signing big name guys or bringing in an eight figure salary. Forget about trading Korver/Brewer/Watson for a big name player. The Bulls will be shedding salary this season and their 10 deep roster will look more like a seven deep one with some ring chasers next year.