If there was ever a season designed to facilitate a massive drop in the NBA salary cap, it would be the 2020-21 campaign. While such an outcome is never ideal, there was hardly any cap space available around the league anyway. Only seven teams were on track to have significant cap space this summer, and some of them may have seen that space wiped away by contract options anyway.
The 2020 class of free agents is notoriously weak, and seven of the top 14 players by our rankings have player options. Yes, there would be fallout, but most teams weren’t planning to spend their cap space, and most of the players who would have taken advantage of that space can simply wait a year and try their luck in 2021 anyway.
But the salary cap is a complex mechanism, one ill-equipped to handle the lasting fallout of a global pandemic due to the COVID-19 outbreak. Whether the NBA season returns or not, the league has lost millions, if not billions, of dollars, and as every standard of player salary is determined by revenue, it is destined to fall even if we can’t say for certain by how much.
A compromise of some kind is likely coming. It may involve cap smoothing. It may involve a frozen cap for a predetermined amount of time. But any solution the league and players agree to needs to anticipate potential ancillary problems lowered salary barriers could create. While a lowered cap itself might not have a major impact on next season, a lowered luxury tax line could potentially be catastrophic, and preventing the fallout from one would require aggressive league intervention.
The tax, like the cap, is based on a predetermined percentage of the league’s basketball-related income. For the sake of simplification, the cap line is typically set at around 43 percent of that income divided by 30 teams, while the tax line is usually around 53 percent divided by 30 teams. This year’s cap is approximately $109.1 million. The tax line is approximately $132.6 million.
How much a team actually pays in taxes depends on how far above that threshold they are. The penalties get worse the more a team spends, and those penalties grow even larger when a team has paid the tax either three years in a row or four of the past five (the dreaded “repeater” tax). So where does that money go? There is no technical answer. The NBA typically takes half of it to fund overall league ventures, but has the right to take all of it if necessary. Normally, though, half of that money is distributed among the teams that did not pay the tax, and as there are usually far more teams that didn’t pay it than did, there will almost always be heavy pressure on the league office to hand out the collected sum.
This is where problems begin to arise. Whereas the cap and tax line are changed annually, player contracts are locked in years in advance, most of which come with year-by-year raises. Expenses will rise, but the tax line is unlikely to rise with them, forcing more teams than ever to pay the tax. That, in turn, raises the total pool of tax money and lowers the number of teams receiving distributions, incentivizing any team that is close to the line to duck under it for the potential windfall that would follow. All of this adds up to create an environment in which contenders are terrified to spend money and the veterans that they would normally sign are unable to find any. So in the interest of protecting some semblance of financial normalcy in the NBA, the league and players should agree to suspend the tax for at least one season.
To understand why, let’s play this out a bit. Pretend for a moment that the tax line was to remain frozen in place for next season. Before any offseason moves are made and rosters are filled out, there are already four teams above that $132.6 million line, with the assumption that player-options are all picked up: the Warriors, 76ers, Nets and Celtics. The Bucks are only $300,000 below it, but have only 11 players under contract.
Those five teams, barring extreme cost-cutting measures unbecoming of the contenders they are likely to be, will be paying the tax. The four teams already above the line would pay quite a bit of it. Combined, they are almost $48.1 million above the line, and would be in line to pay over $88 million in total penalties … before making a single move this offseason. The Warriors top that list at around $33 million in owed taxes. Think they would’ve been so eager to take on Andrew Wiggins‘ contract if they’d suspected such a low tax line?
They’re hardly the only team to make moves assuming a higher tax line that would be devastated by a lower one. The Houston Rockets are another prime example. As of right now, they are around $2 million below our projected 2020-21 tax line, and to some extent, that was likely by design. Despite owner Tilman Fertitta’s claims to the contrary, almost every decision the Rockets have made since he purchased the team indicates that they are unwilling to pay the tax under any circumstance.
They made a number of frantic moves at the 2019 trade deadline to duck below it, and could have taken on more salary in their blockbuster four-team deal at the 2020 deadline and presumably gotten another player in the process, but chose not to. Fertitta has among the lowest liquid wealth of any NBA owner. He financed his purchase of the team itself through a bond sale that saddles him with debt, and his team was the one most heavily hit by lost revenue in China, thanks to the comments made by his GM, Daryl Morey. If the Rockets weren’t going to pay the tax before this coronavirus outbreak, they aren’t exactly better-positioned to now.
But given the current construction of the Rockets’ roster, avoiding it would be extremely difficult. The combination of James Harden and Russell Westbrook alone is in line to make nearly $82 million, and their five highest-paid players are owed almost a combined $119 million before the bench is even accounted for. That would mean filling 10 roster spots with only around $14 million, a virtual impossibility before you remember that there are already some bench players under contract.
If the Rockets had seen this coming, they likely would have chosen not to extend Eric Gordon this offseason. He is owed almost $17 million next season, and in shooting a career-low 37 percent from the field, he has become virtually untradable when you consider his age (31) and injury history (extensive). Houston getting below the line would essentially have to involve a trade of one of four players: Harden, Westbrook, Robert Covington or P.J. Tucker. Those are its four best players. Fertitta, an owner whose financial standing is relatively weak, might have to choose between paying a tax he may not be able to afford or gutting a team with real championship aspirations.
So far, the teams we’ve discussed have mostly come from big markets, and while relief efforts might seem like the unnecessary implementation of trickle-down economics, they aren’t the only teams in desperate need of a bailout.
The Denver Nuggets are the model of a small-market contender. Their best player, Nikola Jokic, was drafted in the second round, and the majority of their roster is homegrown. When they come up for extensions, they are typically either signed or traded to teams more willing to pay them.
But despite one of the highest net worths of any NBA owner, the Kroenke family runs the Nuggets on an extremely tight budget. They have never paid the luxury tax, and in the summer of 2019, gave up a first-round pick in a trade with the Nets just to avoid it. They are one of only two NBA teams not to have their own G League team, and unlike most teams, they don’t have a designated practice facility, instead practicing at Pepsi Center.
The Nuggets also have a number of free agents to re-sign this offseason. Paul Millsap, Jerami Grant, Mason Plumlee and Torrey Craig all have expiring contracts, and thanks to Jamal Murray’s new max extension, they already have almost $91 million committed to their top four players next season. Retaining all four of those free agents for the long haul without skimping on the rest of the roster was already going to be difficult. If faced with the choice of doing so or avoiding the tax, their history suggests that the Kroenkes will let at least one key player walk.
Small-market teams around the league will be faced with similar choices. The Indiana Pacers, long run on a shoestring budget, have around $8 million wiggle room. Would they be willing to use their full Mid-Level Exception to improve? Would the Jazz pay to keep Jordan Clarkson? Will the Magic keep Evan Fournier? And remember, this entire exercise has been premised on the tax line remaining identical to this season’s. If it were to drop even lower, a distinct possibility, all hell could break loose as teams frantically try to trade away salary in an effort to avoid the tax. Doing so would likely net a cut of an enormous overall tax pie.
The tax wasn’t designed to fill the coffers of cheap teams. It was meant to limit the spending power of the wealthiest ones. But if the tax remains in place next season, those rich teams are exactly who benefits. Steve Ballmer is worth over $50 billion and is currently privately financing his own arena. He also owns a Clippers team that is around $19 million below our projected tax line before giving new contracts to Montrezl Harrell and Marcus Morris. He can afford to pay whatever it takes to keep them, just as the Lakers are so outrageously profitable that they’ll be able to keep all of their own free agents and even add a few from the outside as well. But normal teams don’t have that luxury. Their expenses need to be balanced against their revenue, and an out-of-nowhere tax bill would make that impossible.
There are smaller measures that the league could theoretically take. It could untie the tax line from revenue and set an artificial number for it. Reinstituting the amnesty clause, the provision previous CBAs have included to give teams a one-time escape on bad contracts, might make sense as well. But such solutions would have other unintended consequences, and the more complicated the answer, the harder those consequences would be to track.
So in the interest of maintaining competitive balance and incentivizing whatever spending is possible in the new financial world we’re about to enter, the NBA needs to suspend the luxury tax for at least a single season, if not longer. Not to do so would be tantamount to punishing teams for signing players to long-term deals over the past several seasons and warning them not to pay new players in the immediate future. Unless the NBA is prepared for circumstances that grant the Lakers and Clippers an unfair advantage and leaves dozens of veterans underpaid, it will take this step to maintain some semblance of a level playing field moving forward.
