Absolutely horrible. There's no way to prove intent on something like that. I fully expect the NBA to review that and downgrade it. Just ridiculous.
The flagrant foul rule says nothing about intent. Unnecessary contact is a flagrant-1. Unnecessary and excessive contact is a flagrant-2. It was clearly unnecessary contact. Because the elbow struck the head, I think they'll leave it at a flagrant-2.
http://www.nba.com/analysis/rules_b.html
How is it "clearly unnecessary contact"

What I see is smart trying to use his forearm to create space while he's going up for a layup - Payton just happened to be right where his arm hit.
By definition, "unnecessary contact" would mean you are making contact with a player in such a way that does is not a basketball play. A perfect example would be one of those Dwight Howard elbows away from the ball or outside of regulation. Unnecessary contact does not refer to you trying to create space for yourself and accidentally hit a player in the process.
For example when you are trying to stop a player from scoring on the fast break, so you grab him around the neck - that is unnecessary contact because simply slapping his arm or similar would have likely sufficed, and so you have gone beyond what you needed to do to stop the player from scoring.
Unnecessary and excessive is when you try to stop that fast break by grabbing the offensive player around the neck, then throwing them to the floor. This is unnecessary because you could have stopped the basket without grabbing them around the neck, and it's excessive because you had already stopped the basket when you DID grab them around the neck, so the second action of throwing them to the floor achieved nothing other than displaying aggression.
I don't see what Smart did as unnecessary - to me it was clearly a basketball play. It's not like he ran up to Payton and clotheslined him. He was trying to score and trying to create space with his forearm (which NBA players always do, and always get away with) and Payton happened to be in the trajectory of his swinging forearm.
If this was a Lebron James or Kevin Durant it probably would have been a no call, and a simple offensive foul and the absolute most. No chance they would have called a Flagrant 1, let alone a Flagrant 2.
This league and it's officials are ridiculous - no consistency at all. If you're going to call stuff like this as you did then that's fine, but if you're gong to do that then call it the same way for everybody. I see stuff like this all the time in the league and half the time it doesn't even get called.
Dwyane Wade dislocated Rajon Rondo's arm and Dwight Howard grabbed Paul Pierce's jeryey and threw him to the floor - both plays were far more dangerous then this one and neither one of them was called a Flagrant 2. Hell, Howard has caused so many 'stray elbow concussions" that he could probably have his own highlight reel just for that play.
It's disgraceful how this league changes the way they make calls and treat players depending on which team they are on or how much experience they have, and/or reputation.