Understanding the Luxury Tax

[Randolphkeys]

I wrote this post in the paid area of the site and put a little work into it. Then I realized it's worth creating a separate thread to discuss how the luxury tax works, and why the offsets on before the 2017 - 2018 season will be a summer of tough decisions.

Dan Gilbert seems willing to pay the luxury tax within reason this year and into the 2016 - 2017 season. The reality is that teams competing for a championship must, unless they were very lucky to group a few All Stars on rookie deals all in the same window.

Here is the luxury tax penalty before the repeater tax, which kicks in the third consecutive year a team is over the cap. I got the rates at each tax bracket from an article when the new CBA came out two years ago:


NORMAL TAX RATES


Increment: Taxed at: Incremental total: Running total:

$0-$4,999,999 over $1.50 - $1 $7.5 million $7.5 million

$5 million - $9,999,999 $1.75 - $1 $8.75 million $16.25 million

$10 million - $14,999,999 $2.50 - $1 $12.5 million $28.75 million

$15 million - $19,999,999 $3.25 - $1 $16.25 million $45 million

$20 million - $24,999,999 $3.75 - $1 $18.75 million $63.75 million

$25 million - $29,999,999 $4.25 - $1 $21.25 million $85 million

$30 million - $30,463,009 $4.75 - $1 $21,997,200 $87,219,720

The repeater tax is difficult to quantify. Basically, every five million over the cap in the 2017 season is another knee-buckling percent higher in tax for the teams slightly overy the capplication and onot the highest end of 30+ million over the tax line.


REPEATER TAX RATES


Increment:Taxed at:Incremental total:Running total:

$0-$4,999,999 over $2.50 - $1 $12.5 million $12.5 million

$5 million - $9,999,999 $2.75 - $1 $13.75 million $26.25 million

$10 million - $14,999,999 $3.50 - $1 $17.5 million $43.75 million

$15 million - $19,999,999 $4.25 - $1 $21.25 million $65 million

$20 million - $24,999,999 $4.75 - $1 $23.75 million $88.75 million

$25 million - $29,999,999 $5.25 - $1 $26.25 million $115 million

$30 million - $30,463,009 $5.75 - $1 $26,623,020 $117,662,302

Adding in Tristan Thompson and his 7.1 qualifying offer, the Cavaliers are at just about $95 million without JR Smith, which is 25 million over the cap. EDIT: I just read that the report of Thompson signing the QO was hasty and since taken down. After signing JR, we can trust the Cavs will be in that 30+ million over the cap bracket, which is $87 million in tax alone. EDIT: The Cavaliers stand to be in this highest tax bracket of $4.75 per dollar spent whether Tristan signs a QO or longterm deal if the Cavaliers do sign Smith.

The repeater tax for the highest bracket is $117 million a year, so Gilbert is looking at a 30 million jump in 2017. This is the real worry, I believe: being in the highest tax bracket during the 2017 - 2018 season.

 

[westsidebob]

Good start, but a few points:

1) Tax line is $76.8M this year.
2) Repeater tax is only after paying tax 3 of last 4 years, so it can't apply to the cavs until 2018 at the earliest.
3) Veterans signed to one year minimum deals only count as $947,236 against the cap
3) Thompson's QO is $6.8M
4) Payroll with Thompson's QO would be ~$85M
5) If TT signs the QO and JR comes back around $5m, they would be ~$14M over the tax line and owe $25-30M (assuming Pointer signs for the mininum and they roll with 14).

This is why it's in the Cavs' best interest for TT to sign the QO. The difference between $6.8M and $14M (or more) is $25-35M in tax over and above the additional salary. They roll the dice one more year and still keep his Bird rights, so they can always top anyone else's offer if they choose to pay the tax.

 

[Randolphkeys]

I'm glad we are starting a thread for this and fine tuning it.

-Bob, you are reading the luxury tax of 2014, which was $76.8 million. The cap for 2015 is 70 million with the tax line at a little over 84 million:

http://www.si.com/nba/2015/07/08/nba-salary-cap-luxury-tax-2015-16-record-70-million

-I agree with you about the veteran minimum deals and forgot to factor that in.

-I have an article that says Thompson's QO is at 7.1 million, but I'll do more research... EDIT yep, all the articles that came out in the past few hours say 6.8 million for the QO. Hoops hype fails again.

-One reason the team might be pushing for team options in 2017 with Varejao (successful) and JR Smith (ongoing) is to have trade options for one final push before the repeater tax kicks in. However, three years in a row over the tax threshold would be the end of the 2017 regular season, not 2018. They went into the tax in 2014, will be this season, and stand to be in the tax in 2016/2017 season. Call 2013 the fourth year when they weren't in the tax, unless I've read this incorrectly.

Okay, I'll keep figuring this thing out... but I believe the chart of incremental luxury tax penalties is accurate.

 

[westsidebob]

You're right on the tax line. I bricked that one.

As of now, I have the Cavs with a salary for tax purposes of $88,631,205. Add $6,777,589 for TT's QO and you're right at your $95M salary figure.

By the way, I've recently been using http://www.spotrac.com/nba/cleveland-cavaliers/cap/ for salary information. Great site.

I think your chart is correct, I compared it to the chart at CBA FAQ http://www.cbafaq.com/salarycap.htm jump to question 21.

Also, keep in mind that the tax is computed on the last day of the league year.

 

[Randolphkeys]

That spotrac.com link is exactly what I've been looking for since shamsports went on hiatus, thank you.

Mind you I originally put this article out there when we heard Tristan had indeed signed the QO. Now the information remains too fluid to compute since TT might be making anywhere from 6.8 million or 14 million this year. But, here is where we are today:

$88,631,205 in salaries right now without TT or Smith addressed. Let's say Thompson is traded for a pick and Smith signs elsewhere, for arguments sake: poof! That is a luxury tax of 3,931,205 without Smith addressed. Gilbert would be paying $1.50 for every dollar over, fairly paltry, and the Cavaliers would be disastrously thin up front without Thompson.

If Thompson signs the QO, they are at 10,708,794 over the tax threshold without Smith addressed. That is $2.50 per dollar over the cap, and so it's north of 28 million in tax and the Cavaliers would still lack a solid two way perimeter player they needed so often last year.

Chances are, Gilbert will have to decide how much money he is willing to invest in being the clear-cut Eastern Conference favorites. He is making a lot of revenue this season after last year's success. The question is going to be how much in taxes make this championship run too expensive to be viable in 2018.

 

[kovanovich]

The work Eric Pincus has been doing with Basketball Insiders (Steve Kyler's outfit) is the best I have seen. I find it more reliable than Spotrac.

In any event, in this case Pincus calculates the Cavs' team salary the same: $88,631,205.

http://www.basketballinsiders.com/cleveland-cavaliers-team-salary/

 

[westsidebob]

That spotrac.com link is exactly what I've been looking for since shamsports went on hiatus, thank you.


Chances are, Gilbert will have to decide how much money he is willing to invest in being the clear-cut Eastern Conference favorites. He is making a lot of revenue this season after last year's success. The question is going to be how much in taxes make this championship run too expensive to be viable in 2018.

That's the $100M question. He's been blatant saying "Money follows, it doesn't lead." But at some point, reality has to come into the equation.

NBA teams make their money two ways - franchise appreciation and playoff revenue. That's three dimensional chess that the average sports fan doesn't consider.

Gilbert's got an ego and the only thing that strokes it is the Larry O'Brien trophy. But he's also a businessman, and he's gotta decide how much money he's willing to pay to buy it.

 

[caf]

The repeater tax for the highest bracket is $117 million a year, so Gilbert is looking at a 30 million jump in 2017. This is the real worry, I believe: being in the highest tax bracket during the 2017 - 2018 season.

I'm not too worried

The CBA runs through the 2020-21 season, although either side may opt out after the 2016-17 season. To do so, notice must be given by December 15, 2016.

http://www.cbafaq.com/salarycap.htm#Q9

 

[Paul]

Thanks for posting this. It's helpful.

Here's a link with some more info as well:

http://www.slamonline.com/nba/understanding-the-new-luxury-tax-system/#q17m2l34heHZvwco.97

 

[CavsFanJapan]

The SportTrac website does not have S. Kaun on there list. Is this not official yet? That would add a little more to the salary.