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Wednesday, July 27, 2005
More on the NBA Agreement: The Allan Houston Rule Explained

One of the most interesting parts of the new NBA agreement is the so-called 'Allan Houston Rule', which allows teams to waive one player prior to October 1, without having to pay any further luxury tax on the player's contract. It is called the Allan Houston Rule, because the Knicks will certainly use it to rid themselves of Houston, who is often injured and is still owed $40 million. Michael Finley, who is owed $51 million by the Mavericks, is another potential candidate.

This is a very odd idea. Under the rule, a team that waives a player must still pay the entire contract, even if the player signs with another team. Thus, Houston is guaranteed to receive $40 million worth of checks from New York on top of the money he will receive if he signs with another team. So, in essence, he will be getting paid twice (though his second check will "only" be about $5 million a year). In addition, New York receives no salary cap relief. Thus, the team pays the player a full salary and for salary cap purposes it is like the player is still on the roster.

So why would any team do this? The answer lies in the incredibly stringent NBA luxury tax. If league-wide player salaries exceed 61% of basketball-related income (ticket sales, television rights, concessions, sponsorships, etc), then each team must pay a $1 tax for each $1 it is over the 61% threshold. For a team like New York, whose payroll was about $40 million over the threshold last year, this is a lot of money. Moreover, teams not over the 61% threshold can hold onto the exemption until a year that they are, which in essence gives them free reign one year to spend as much as possible under the cap without paying any luxury tax penalty.

For more, see these excellent articles by ESPN's Marc Stein ("Most teams prefer tax to tax loophole,"7/25/05; "Allan Houston Rule FAQ," 7/25/05). It remains to be seen how teams will take advantage of this one-time exemption, but it might make things interesting in player deals over the next few years.


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