The new luxury tax system will doom us all—including three major-market teams.
by Leo Sepkowitz | @LeoSepkowitz
The new Collective Bargaining Agreement changed a lot of stuff. In terms of promoting parity throughout the League, nothing in the deal is more important than changes to the luxury tax system. Basically, going forward, a team will have to pay a lot more for every dollar they are over the luxury tax line than they have in the past. The further over the tax line a team is, the steeper the penalty gets.
In the last CBA, a team $3 million over the tax line would have had to pay $3 million in taxes. Now, a team $3 million over the tax line must pay $1.50 for every $1 over the tax line, leaving them with $4.5 million in luxury taxes. A team $12 million over the tax line would have paid $12 million in taxes under the last agreement. Now, that team must pay $1.50 per $1 over the tax for the first $5 million over the tax, $1.75 per $1 for the second $5 million over the tax, and $2.50 per $1 for the remaining $2 million over the tax, bringing the total to $21.25 million. Basically, tax-paying teams are getting hit harder, and teams that are consistent luxury tax payers will face even steeper penalties in the future, called Repeater Taxes.
Those are the basic ideas behind the new system, and behind this article. If you feel like you have a handle on them and/or trust my math skills, skip the next sentence. If you want to read more about some CBA terms that will be flying around in the story to follow, just click here and read up.
Four More Things To Remember
—”Estimated Tax Line” is my predicted $70.5 million number. The real tax line is a little less than that now, but next year it should increase slightly (since the salary cap will). If a team is over the tax line, it pays the luxury tax.
—”Currently Sorta Guaranteed ’13-14 Payroll” is what’s guaranteed for next year as of now, plus some assumptions about upcoming player and team options.
—”Projected Amount Over Tax Line” takes the Currently Sorta Guaranteed ’13-14 Payroll and subtracts the Estimated Tax Line from it. It tells us how far over the tax a team is. The number can deceive since it doesn’t factor in upcoming offseason moves.
—”Projected Tax Owed For ’13-14 Season” uses the Projected Amount Over Tax Line to dictate how much money the team’s owner will pay in taxes for next year’s roster. Again, it’s based on the current roster, so the real number will likely be different from one the listed in the chart. For instance, the Lakers’ projections use only the eight guys currently locked into the ’13-14 team. Still, it gives us a good idea of what’s going on.
So, without further ado, let’s pick apart some major franchises.
Los Angeles Lakers
Tax Owed For
|Key Free Agents|
Whether it’s the right move or not, the Lakers are going to try to re-sign Dwight Howard to a max contract this summer. The minimum value of the first year in that contract is around $20.25 million, but Howard likely won’t settle for that. Let’s pencil his ’13-14 salary in at $21.5 million. They won’t use the Amnesty Clause on Kobe Bryant because it would mean him playing in a different uniform next year (not acceptable to Lakers fan base), so his nearly $30.5 million salary gets tacked on. They’ll probably instead use the Amnesty to slice off the final year of Metta World Peace’s contract (~$7.7 million), but he’s included in the projections above. Pau Gasol will make shy of $20 million in the final year of his deal and Steve Nash is slated to earn more than $9 million next season. Steve Blake, Chris Duhon and Jordan Hill will somehow earn a total of over $11 million. L.A. will likely pick up Jodie Meeks’ $1.55 million team option because he’s their only shooting guard with two healthy Achilles. Earl Clark is an unrestricted free agent. Messy.
If they want to dump Kobe, trade Gasol and Nash and let Howard walk, they’ll be in a great financial situation, but obviously that would leave them with a terrible team. Assuming Howard, Kobe, Nash and the Blake/Duhon/Hill trio return, they have a few options this summer.
Option 1: Keep Gasol and World Peace. No chance they do this. With both forwards on board plus an extra $2 million to round out the roster, the payroll will be over $103 million. The tax on that money is nearly $98 million. Next year’s total tab for this year’s seventh seed: $201+ million. Like I said: no chance.
Option 2: Keep Gasol, Amnesty World Peace. If they go this route, they’ll have a payroll around $93.5 million. Add $3 million to finish off the roster, and the luxury tax on that payroll is just north of $68 million. Since World Peace would still get his money (even though it wouldn’t count against the cap) add on the more than $7.7 million the owners have to pay him. Ladies and gentlemen, I present to you a 38-win team with a $172,276,368 tab. (Note that just amnestying MWP saves the team around $30 million next season—no-brainer.)
Option 3: Trade Gasol, Amnesty World Peace. By trading Gasol and taking back very little money in return, L.A. would save a ton of dough. Say they swap Pau for Cleveland’s 19, 31 and 33 overall picks in the upcoming Draft. Based on last year’s Draft and rookie contracts, it would take about $2.5 million total to sign those three draft picks. Add another $1 million to round out the roster, re-adjust the payroll, re-do the tax math, add on World Peace’s amnesty money once again and the total tab for the new team comes out to a shade over $95 million, taxes included. That’s nearly $80 million lighter than Option 2, but they’d probably be a 35-win team.
The ’14-15 season looks a little better, but not much. Right now the only guaranteed money for that season goes to Nash (who will be 40 by then), but that’ll change soon. Howard’s deal (likely around $23 million if he stays) will be on the books. If Kobe decides to hang around, he’ll be there, too, and probably not for particularly cheap (I think KG’s three-year, $34 million I’m Retiring Here contract is a good guideline for a Mamba deal), so those three could easily suck up $45+ million. They have no draft picks in the near future thanks to the Nash and Howard trades, and less young talent than any team in the League. The Lakers might be headed into a dark multi-year stretch.
P.S. Since Lakers execs are definitely reading this, here’s my five-step solution: 1. Sign-and-trade Howard to Houston (some Asik/Parsons/Motiejunas/TRob/TJones package) or Golden State (Barnes and Bogut’s expiring). D12 isn’t worth five years, $118 million. 2. Trade Pau to Cleveland (picks) or Minnesota (Kirilenko’s expiring and Derrick Williams) or anywhere else without taking back significant long-term money. 3. Trade Nash for a bag of balls, as long as the bag of balls isn’t guaranteed money past next season (real proposal: Nash returns to Dallas for Shawn Marion’s expiring). 4. Hope Kobe retires after next year because it makes re-building a lot easier. 5. Use the lure of L.A. to haul in 2014 free agents. The unrestricted class includes LeBron, Dirk (who would never go to L.A.), Wade (ditto), Melo (ditto, probably), Pierce (ditto, hopefully), Deng, Bosh, Gay, Granger, Lowry, Z-Bo and Gortat. The restricted class includes Paul George, DeMarcus Cousins, John Wall, Greg Monroe, Larry Sanders, Derrick Favors, Eric Bledsoe, Lance Stephenson, Greivis Vasquez and Avery Bradley (though some of those guys will get extended before next summer, and it’s always tough to steal away an RFA). In short: BLOW THE WHOLE THING UP!
P.P.S. I’m always in favor of blowing the whole thing up. Seriously, put me in charge of any franchise, and within 45 minutes they’d have no guaranteed contracts past 2014 and a bunch of crappy picks.