How the Luxury Tax Impacts the NBA Trade Deadline

Blake title image

There are two competing forces that drive NBA front offices: talent and money. Talent frequently draws all the headlines, but the finances play a major role in dictating the outcome. The blockbuster trade for Blake Griffin is an example of the interaction between these two elements: The Detroit Pistons were eager to land a talented star like Griffin; the Los Angeles Clippers feared the potential downside of paying an aging, injury-prone Griffin $142M over the next four seasons. Every team is in a unique situation, but talent and money are the components that shape their thought processes.

On the money side of things, it’s not as simple as adding up all the salaries for this season. Teams have to plan years in advance while worrying about when a star is going to hit free agency, when to hoard cap space for a free-agent splash, and whether they can afford to pay the luxury tax.

This last point—the luxury tax—is particularly fascinating to me given the role it played in the recently completed Nikola Mirotic trade. Discussions between the Chicago Bulls and New Orleans Pelicans almost fell apart because the Pelicans didn’t want to pay the luxury tax next season. Even though swapping Omer Asik for Mirotic is a clear on-court upgrade, the finances were a key part of New Orleans’ calculus.

The CBA nuances surrounding the Mirotic – Asik trade intrigued me, so I analyzed the cap sheets for every team and investigated some of the scenarios where the luxury tax may dictate trade strategies at the upcoming trade deadline.

Before we get to your regularly scheduled programming, however, I’ve written a brief explanation of the luxury tax for those of you who may be unfamiliar with the concept. Feel free to skip ahead to the team-specific analysis if you already know what the luxury tax is all about.


What is the NBA Luxury Tax?

Adam Silver.jpg

The luxury tax is an attempt by the NBA to level the financial playing field. The NBA has a salary cap (a maximum payroll for a roster), but it is a “soft cap”, not a “hard cap”. With a “hard cap” teams cannot exceed the cap for any reason (for reference, the NFL has a hard cap). The NBA’s “soft cap” gives teams exceptions that can be used to exceed the cap in specific situations (e.g. re-signing your free agents with Bird rights).

Since there isn’t a hard spending limit (except in specific situations, but that’s covered later), big-market teams could gain a competitive advantage purely because they have deeper pockets. The Los Angeles Lakers, for example, could spend hundreds of millions of dollars on player salaries while remaining profitable.

In this scenario, small-market teams like the Memphis Grizzlies wouldn’t be able to keep up and would have no real chance of competing for championships. To rectify this problem and impose some kind of payroll restriction, the NBA implemented a luxury tax where a team pays a penalty for every dollar they spend past a predetermined luxury tax level. For 2017-18, this luxury tax line is $119.3M.

The wealthiest owners still have a spending power advantage in the short-term (as Dan Gilbert’s Cleveland Cavaliers and Steve Ballmer’s Los Angeles Clippers have shown), but they will at least need to pay through the nose to do it (and teams that don’t pay the tax will receive some of that money). There are also additional restrictions that come with paying the tax which hamper a team’s flexibility.

The TL;DR version? The luxury tax aims to deter runaway spending in three ways:

  1. Make the owners pay a penalty for exceeding the tax line (the luxury tax)
  2. Make the owners pay a more punitive tax rate if they’re consistently paying the luxury tax (the repeater tax)
  3. Limit the team’s flexibility to make trades and sign free agents

The main takeaway is that, unless their team is really good, most owners want to avoid the luxury tax because of the aforementioned consequences. Now that you have some idea of how the luxury tax works, let’s explore how it could affect decisions made at the trade deadline.


Way Over the Luxury Tax: Little Impact on Trade Deadline

Warriors-Cavs

Table 1 - Way over the Tax

These three teams are way over the luxury tax line, and there they shall remain. All three view themselves as title contenders and likely won’t do anything to compromise a chance of championship glory (even if those odds are slim). Cleveland and OKC will sniff around for upgrades, but it doesn’t seem like worries about the tax will play a primary role in their decision-making process1.

The Cavaliers will trigger the repeater tax rate this season (which is why their tax payment is so much higher than that of Golden State), but there’s no way to get around that unless they make some major salary dumps and sacrifice talent. That kind of penny-pinching move risks further alienating LeBron James and pushing him into the arms of another team in free agency.

Similarly, the Thunder face repeater tax concerns for next season, but GM Sam Presti has pushed all of his chips into the pot with this roster. OKC is trying to convince Paul George to re-sign, and any move that hurts the depth chart for purely financial benefits will not be received well.

As for the Warriors, why rock the boat when the water is calm, beautiful and will likely lead you to another title?

Despite the hefty payrolls facing all three teams, talent will be the primary factor influencing their trade deadline pursuits. Can OKC find a credible replacement for Andre Roberson? Can the Cavs find anyone capable of two-way play? Will the Warriors finally find a player with the vocal range to harmonize with Stephen Curry? These are the types of pressing questions they’ll try to address at the deadline.


Hovering Over the Tax: Looking to Shed Salary

NBA: Portland Trail Blazers at Washington Wizards

Table 2 - Salary DumpersThis season would mark the first dip of the toes into the luxury tax pool for the Washington Wizards and Portland Trail Blazers2. Both owners (Ted Leonsis for Washington and Paul Allen for Portland) seem willing to pay the tax for competitive teams and, with both teams firmly in the playoff picture, it’s unlikely that any core rotation pieces are moved at the deadline. It is possible, however, that minor moves are made on the fringes to trim costs and duck under the tax line.

For the Wizards, the likeliest salary-dump candidates are Jason Smith ($5.2M), Jodie Meeks ($3.3M), Sheldon Mac ($1.3M) and Chris McCullough ($1.5M)3. Smith and Meeks (who has requested a trade per Candace Buckner) have player options for next season which lowers their asset value. Washington will have to throw in a 2nd-round pick and/or hope that a trade partner shows enough interest in Mac or McCullough as a young-ish prospect. Since the Wizards are $5.8M above the tax line, any tax-evasion maneuver would require they move Smith and at least one other contract, or Meeks, Mac and McCullough.

For the Blazers, Noah Vonleh ($3.5M) is the most obvious candidate for an unceremonious salary dump because he’s been in and out of the rotation and Portland just drafted two young big men (Zach Collins and Caleb Swanigan). Given Vonleh’s expiring contract and the fact that he’ll be a Restricted Free Agent, getting under the tax should be easier for the Blazers than it is for the Wizards, but they will still likely need to include a 2nd-rounder unless a team is particularly enamored with Vonleh’s upside.

Since both teams would be trying to shed salary, the feasible trade partners are teams that still have the cap space to absorb these players without sending salary back. Here are the teams that fit the bill:

Table 3 - Cap Space Teams


Barely Below the Tax and Hard-Capped: Limited Flexibility in Trade Talks

Rockets-Pelicans

Table 4 - Hard-CappedEach of these teams has two things to worry about if they’re looking to explore the trade market: the luxury tax and the hard cap. (I know, I know, I just told you the NBA DOESN’T use a hard cap. There are a few ways teams can end up hard-capped. The table explains why they triggered the hard cap, but I refer you to Larry Coon’s CBA FAQ for more information on the subject).

For the purposes of this discussion, all you need to know is that these teams aren’t allowed to spend more than $125.3M for their payroll this season.

Los Angeles Clippers

After moving on from Blake Griffin, the Clippers seem poised for a fire sale.

Fire Sale

Yes, I only used the term “fire sale” for this GIF, but the Clippers have the only Tobias in NBA history on their roster, so this was destiny.

The Clips have paid the luxury tax in each of the previous four seasons, so they’d pay the dreaded repeater tax if they exceed the tax this season. Even if Los Angeles can’t find any enticing offers for DeAndre Jordan, Lou Williams or Avery Bradley, they will surely shy away from adding any additional salary so they can avoid paying the tax again this season for a team with no shot of contention.

New Orleans Pelicans

After trading for Mirotic, the Pelicans pursued Greg Monroe before he spurned them for a bigger offer from the Boston Celtics. Due to the hard cap, the Pelicans could only offer Monroe $2.2M while the Celtics signed him for $5M.

The Pelicans have already lost out on one roster upgrade because of their proximity to the hard cap, and it will limit their options to round out their depth chart. If New Orleans actually offered Monroe $2.2M, it means they were willing to pay the luxury tax for him—a significant development considering some of the market dynamics in New Orleans. It remains to be seen whether they’re willing to pay the tax this season for a less impactful player, but they could use an additional wing or center.

Detroit Pistons

SVGMost teams outside the playoffs will normally try to avoid paying the luxury tax, but the Pistons are a rare exception. As Kevin O’Connor of The Ringer reported, Stan Van Gundy (Head coach and President of Basketball Operations) is under pressure to win now and make the playoffs, which may push the Pistons into tax territory.

The Pistons have moved into a brand, spanking new arena in downtown Detroit, but they boast the second-worst attendance (by percentage) in the league per ESPN. That is a major problem for the franchise as new arenas typically boost attendance. The financial weakness of the team was presumably a major reason behind the trade for Blake Griffin—a splashy star with cachet among casual fans—and the Pistons may not be done dealing.

Detroit may want a temporary point guard to fill in for Reggie Jackson as he recovers from injury, or they may want to flip one (or a few) of their superfluous big men (Brice Johnson, Willie Reed, Eric Moreland, Henry Ellenson, Anthony Tolliver, Jon Leuer) for more depth on the wing.

The Contenders: San Antonio Spurs, Toronto Raptors & Houston Rockets

All three franchises can reasonably view themselves as contenders, so it wouldn’t be shocking to see all three add talent before the end of the season and pay the luxury tax as a result. For some owners, the luxury tax is a deal-breaker, but all three organizations seem pragmatic enough to bear the extra costs if it brings in meaningful roster upgrades. Of course, the downside is potentially disrupting the excellent chemistry of each squad.

San Antonio Spurs

Without more information on the severity of Kawhi Leonard’s injury, it’s hard to know where San Antonio stands as the trade deadline nears. The Spurs generally aren’t very active around the deadline, but they could also use the buyout market as a resource and have their bi-annual exception (BAE = $3.3M) to use for that purpose. If they want to avoid the luxury tax, however, they can only spend $2.3M of that BAE to add a player.

Toronto Raptors

This version of Raptors is on pace to be the best team in franchise history and, with the Cavs looking decidedly shaky, perhaps GM Masai Ujiri talks himself into taking a swing at the deadline. The Raptors have plenty of young players that should interest most teams, but they have even less space to work with than the Spurs.

The Raptors could use a little more offensive firepower, so Rodney Hood ($2.4M) becomes an interesting trade target who could add more two-way play on the wings and a dose of creation to boost their late-game offense. Another potential area of need is wing defense. OG Anunoby has been terrific this season, but he’s still a rookie and the Raptors will likely need to go through LeBron James and/or Giannis Antetokounmpo in their quest for postseason success.

Houston Rockets

Morey

We’re used to seeing GM Daryl Morey work his magic at the trade deadline, but that might not be the case this year. The Rockets’ only real need is a backup PG who could buy more rest minutes for Chris Paul and James Harden down the stretch, but that’s more of a regular-season concern.

Another factor Morey must consider is the team’s potential as a free-agency destination. The Rockets will do their best to woo stars like LeBron James and Paul George and—given Morey’s track record of trading for stars—it’s possible the Rockets could add a major piece and still be a taxpaying team next season4.

If they view that path as remotely possible, they may want to stay under the luxury tax this season to they delay the repeater tax in the future. Houston paid the tax in 2015-16, so paying the tax this season (2017-18) and next season (2018-19) would make them a repeater tax team in 2019-20. Given the age of Chris Paul (and LeBron James if they acquire him), the Rockets may have no qualms about paying the repeater tax in this narrow window of contention, but this is a prime example of how teams must constantly be aware of the long-term implications of their decisions. A seemingly minor move that adds only $2.6M of salary for this season could cost the Rockets tens of millions of dollars in repeater tax money down the road.


Future Luxury Tax Concerns

Hornets.jpg

That Houston Rockets example is a nice segue into this section. The job of an NBA GM would be much easier if they only had to worry about the current season. Planning for the future is a difficult task, and some teams might make trades this week with next year in mind.

Charlotte Hornets

These Hornets just can’t catch a break. After tanking their asses off in 2011-12 and finishing THIRTEEN (13!!) games behind the second-worst team in the league, they “won” the 2nd pick in the draft lottery and missed out on Anthony Davis.

Then, they had their best season in franchise history just before the massive cap spike in the summer of 2016 and spent a ton of money to re-sign their free agents. As a result, their cap sheet is indisputably hideous, bloated with the inflated contracts of Nicolas Batum, Marvin Williams and Cody Zeller (and Dwight Howard, though he wasn’t a 2016 signing).

Barring a surprising roster addition, the Hornets won’t pay the luxury tax this season, but the front office is certainly trying to offload some of that bad salary in advance of next season to avoid paying the tax in 2018-19. Unfortunately, that will require parting with a positive asset. The Hornets will have to package Kemba Walker5, their own draft pick(s) and/or Malik Monk with one of those bad salaries. Any moves they make at the trade deadline will probably be made with the goal of shedding long-term salary.

New Orleans Pelicans (again)

We’ve already witnessed how the Pelicans’ luxury tax concerns affect their trade process. The Nikola Mirotic trade was initially held up because the Pelicans were hesitant to pay the $12.5M owed to him next season. In a vacuum, that seems silly since Mirotic is a nice fit for their frontcourt (whether they re-sign DeMarcus Cousins or not) and he’s fairly paid.

The reason for their concern was the high cost of their team next year. If they re-sign Boogie, the Pelicans will be almost certainly be a taxpaying team next season. New Orleans would ideally like to offload some 2018-19 salary now, but that seems unlikely.

The Pelicans are still making a playoff push this year and don’t have many assets to trade after sending a 1st-round pick to Chicago in the Mirotic deal. As a result, the Pelicans will probably only have minor moves at their disposal for the rest of this season and will have to wait until the summer to offload some 2018-19 salary (like Alexis Ajinca’s expiring $5.2M).

Denver Nuggets

Nikola Jokic is going to get paid this summer, which means the Nuggets will have to pay the luxury tax in 2018-19 unless they offload some salary. Denver is firmly in the playoff race, so they won’t be desperate to trade away rotation players—that can wait for the summer. That said, they will likely test the waters on players that aren’t integral to their success.

Two names clearly fit the bill: Kenneth Faried (owed $13.8M next year) and Darrell Arthur (player option for $7.5M for next year). The Nuggets have a boatload of second-round picks in their asset pool along with a number of interesting young prospects (e.g. Juancho Hernangomez, Malik Beasley, Emmanuel Mudiay), so they have ways to make those contracts appealing. That said, they may find more success if they wait until the summer when teams know how they’re spending their cap space.


1) The luxury tax probably won’t impact their decision-making, but it does limit their flexibility. Taxpaying teams have a narrower window for salary-matching when making trades which can complicate the process.^

2) Portland came amazingly close to paying the tax last season. Maurice Harkless refused to shoot 3s down the stretch in order to earn a bonus for shooting 35% from downtown. He stayed above 35% for the season, and his bonus very nearly pushed the Blazers into tax territory. Per Bobby Marks (then of The Vertical) Portland came within $4,462 of paying the tax last year.^

3) Tim Frazier ($2.0M) would have probably been on this list as well, but John Wall’s knee injury has made Frazier less replaceable.^

4) If the Rockets clear cap room sign LeBron or PG, it’s unlikely that they’d be a taxpaying team in 2018-19. When the Warriors cleared cap space to sign Kevin Durant, for example, they didn’t pay the tax for the 2016-17 season. In the 2017 offseason, they then spent big money re-signing Durant, Curry, Iguodala and Livingston, so the team is now locked into the tax unless they trade away one of their stars.^

5) Walker’s name popped up in trade rumors, but those rumors have evaporated since Walker voiced his displeasure with the idea of being traded away and Michael Jordan made it clear he wants an outlandish return in exchange for Walker.^

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