On this topic, its probably worth re-visiting some of the comments made by New Orleans president Hugh Weber -- who oversees the teams business operations -- in mid-May regarding the luxury tax. Webers meeting with the local New Orleans media was interesting to watch, partly because he was able to dispel some of the assumptions that were being made at the time. I remember beat writer John Reid of the Times-Picayune asking Weber, you realize that ESPN is reporting that the Hornets will avoid the luxury tax no matter what, right?
Weber responded that he cant control what ESPN or any other media outlet reports. He later tried to clarify the Hornets philosophy on how they will approach being over or under the luxury tax.
We are going to exceed the luxury tax if it means we are going to be competitive to do so, Weber said. Is it a matter of we have to stay away from the luxury tax (no matter what)? No, its not. I want to make sure the message is clear: We may have to commit to going over the luxury tax, because thats the way of life. Competing is more important to us (than avoiding the luxury tax).
Simply put, if an NBA team can generate significantly more revenue as a byproduct of adding payroll, its worth the additional cost, because it results in a larger profit. To use one real-life example, Cleveland recently agreed to take on Shaquille ONeal immense contract for 2009-10, but that cost may ultimately be offset by an increase in tickets the Cavaliers sell or some of the other revenue-generating aspects that will be boosted considerably by having Shaq on the roster.
At the same time, exceeding the luxury tax doesnt ensure a team of anything in terms of wins and losses. One of the teams that has consistently been at or near the top of the league in player payroll is the New York Knicks, who havent made the playoffs since 2004.
If you look at all of the teams in the (2009) playoffs, half of them have luxury-tax issues and half of them dont, Weber said. Its not a guarantee that once you spend more, youre going to automatically win a championship. It just doesnt work that way. Were going to be smart. Were a business just like anyone else. But its not mutually exclusive: You can be a good team and be fiscally responsible.
One of the ways we measure ourselves is cost-per-win. (Even) if there were no luxury-tax implications, we judge ourselves on how well we do based on that category. (In 2007-08) we were third in the league in cost-per-win. This season we were sixth. Weve had 105 wins over the last two seasons, which ranks seventh in the league, so obviously our philosophies work. Our plan and structure work. So you don't scrap all of that because you have (a disappointing season).
One last note on the luxury tax that can be a bit confusing: it's not calculated until the end of each NBA season. That means that a team could theoretically be over the luxury line all season, but get under it at the February trade deadline and not be assessed the tax. New Orleans was under the luxury tax at the end of 2008-09, but is over it at the moment for 2009-10, due to the increase in the total cap figure of the Hornets who are currently under contract for the upcoming season.
The luxury tax doesnt become an issue until the end of the season, Weber said, when asked about the urgency NBA teams may have to cut payroll during the summer offseason. Its not like we have 30 days to figure it out. Its not where you are today. Its where you are at the end of a season.