NBA Roundtable

2010 Luxury Tax Teams

In General NBA on January 8, 2010 at 5:41 pm

I was reading ESPN’s latest Chris Bosh rumours on the Daily Dime when I noticed a sidebar column on teams in the luxury tax. It had a nice run down of all teams over the tax threshold and I felt it was worthwhile making a note of it:

Lakers $21,430,778
Mavericks $17,891,714
Celtics $14,324,318
Knicks $14,107,734
Cavaliers $13,011,251
Magic $12,574,601
Spurs $10,185,572
Wizards $8,658,888
Nuggets $5,490,379
Suns $4,887,977
Jazz $4,858,225
Hornets $3,331,809
Heat $2,817,658
Rockets $2,611,747

A total of 14 teams are scheduled to pay luxury tax payments this year. Wow, combining to make a total of $136 million. That’s a lot of money that can be redistributed (1/30th per team which is about $4.5 million) to teams below the tax threshold.

Anyway …

  • Teams can get beneath the luxury tax by trading salaries for lesser salaries or for non-salaries.
    • Lesser salaries — partial guaranteed salaries + teams are allowed to take back up to 125% +/- $100,000 in a trade so they can shave some money by taking back less than is going out.
    • Non-Salaries — trade exceptions + trades to teams below the cap without taking back salary + non-guaranteed contracts
    • Contract buyouts — the player’s salary is replaced by the buyout figure in the team’s salaries.
  • If a team gets below the luxury tax threshold they get out of (1) the money owed to the play (2) the luxury tax payments (3) and receive their share of the distributed funds.
    • So for example, a team like the New Orleans Hornets. They are over the LTT (luxury tax threshold) by $3.3 million. Let’s say they cut $4 million in salaries. They gain the $4 million + $3.3 million in tax payments + get their share of distributed funds which is likely to be somewhere above $4 million. That’s a total saving of over $11 million. Considerable money.
  • The most likely teams to try and cut their luxury tax payments are the ones near the threshold. So Miami, Houston and New Orleans. New Orleans seem a prime candidate given their owner’s distaste for spending money + their lousy performance thus far. Miami and Houston will struggle to lower their salaries without significantly hurting their on-court performance but both will make earnest attempts to do so, particularly Miami (Owner Micky Arison doesn’t like paying tax for non-contenders).
  • There’s also some talk of the Knicks buying out Darko Milicic which would slightly reduce their tax bill.
  • The total amount of luxury tax payments is likely to be lower at the end of the season than it is now (but somewhat comparable to our present figures) … unless we some arms races by contenders at the trading deadline.

Note: There’s also a tax rebate for suspensions. So if Gilbert Arenas is suspended, the Wizards will save $74k per game which could add up to almost $3.7 million (50 games) if suspended for the remainder of the season. Orlando (Lewis) and Denver (JR Smith) will also get tax rebates for their suspensions.

Explanation On Distributed Luxury Tax Payments

Here’s a quote from Larry Coon’s CBA summary

Tax money:
  • Teams under the tax level receive a full share (1/30) of the tax money. (Note that if the league expands, the fraction changes.)
  • Some or all of the remaining money may be reserved by the league for “league purposes.”
  • Any remaining tax money that is distributed to teams must go to all teams in equal shares.

“League purposes” may include investing in some venture, or it may include distributing money back to teams. If money goes to teams, the distribution must not be based on the teams’ team salaries (see question number 14) or whether the teams are taxpayers. In other words, it cannot become a disincentive for teams to spend money on players, which would constitute a secondary form of salary restraint.

An example of an acceptable “league purpose” in which money goes to teams would be a revenue assistance plan designed to subsidize teams that lose money, provided that a team’s entitlement is based on a profit/loss/expenses computation that assumes all teams have the same team salary, and the assistance payment is limited to the team’s actual losses.

Last season, the NBA collected $87.35 million in luxury taxes. They distributed $2.91 million (1/30th) of that money to teams below the LTT and kept the remaining $20.38 million as undistributed funds for league purposes.

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