The New Math: NBA Teams and the Luxury Tax

In the wake of last week's Rudy Gay trade, there's a lot of hand-wringing and angst over owners making money-over-winning type decisions. And it's not just the Rudy Gay trade; by my count, this has already happened once, if not twice, in the last year. Since when did potential championship contenders break up their cores too early, as opposed to too late? Isn't winning a title everything in professional sports?

One of the biggest drivers of these decisions would seem to be the new CBA, or more specifically, the new luxury tax. The new costs radically change the math for any team venturing above the luxury tax line. How does this affect NBA teams going forward? Here's a simple look at a few teams, under the following rules:

• Each team's payroll is added up from salary data from HoopsHype.
• Core players are identified for each team.
• Non-core player costs are assumed to be $3mm per year, and filled out until the roster has 12 players.
• The total payroll cost is calculated using the new luxury tax rules.

With those rules, here's the outlook for the NBA's current "super-teams," along with a few others.

MIAMI HEAT

• The core players are: Lebron James, Dwyane Wade, and Chris Bosh.
• The next nine players on the roster make $29.7mm this season ($3.3mm per player).
• No adjustments for assumed free agent signings.

Micky Arison signed up an incredible trio in 2010. Two straight Finals appearances have certainly validated that decision. But the bill is coming due next year. Even with the amnesty of Mike Miller this summer ($32mm in tax savings), team payroll will cost too much in the 2014-2015 season. This is almost certainly a three year window with the current core, which will end in the summer of 2014.

LOS ANGELES LAKERS

• The core players are: Kobe Bryant, Pau Gasol, Dwight Howard, and Steve Nash.
• The next eight players on the roster this season make $23.5mm ($2.9mm per player).
• The adjustments are re-signings for all four core players at their current salaries.

The current Lakers roster is the most unsustainable roster in the NBA, from a cost standpoint. The luxury tax penalties nearly equal the players salaries. The roster would essentially wipe out all the Lakers' economic advantages, while providing a healthy check to every owner eligible to receive luxury tax payments. Even the amnesty of Ron Artest this summer ($29mm in tax savings) would only make a small dent in the tax bill.

NEW YORK KNICKS



• The core players are: Carmelo Anthony, Tyson Chandler, Amare Stoudemire, and JR Smith.
• The next nine players on the roster this season make $24.6mm ($2.7mm per player).
• The adjustments are: re-signing Smith for $10mm per year (2013 and 2014), and re-signing Chandler and Anthony at their current salaries (2015).

The roster is built to win now, but it's unlikely to make it to next season intact. First, JR Smith has a player option for next year ($3mm) that he is certain to decline (he'll command a higher number as a free agent, with more guaranteed years), and the amnesty of Amare could save the Knicks $110mm over the next two seasons (that is not a typo, $110 million). Unless this team wins it all in four months, it's hard to believe they'll stay together in their current form. And it's almost guaranteed that Stoudemire is the one to go.

BROOKLYN NETS



• The core players are: Joe Johnson, Deron Williams, Brook Lopez, and Gerald Wallace.
• The next eight players on the roster this season make $22.0mm ($2.7mm per player).
• There are no adjustments (all core players signed through 2016).

The Nets are in a very tough spot. Their four "core" players are signed through 2016. They've already used their amnesty clause. And the tax bills are significant going forward. If their ceiling ends up being lower than perennial title contender over the next four seasons, the payroll decisions will be difficult to unwind, if not impossible.

CHICAGO BULLS



• The core players are: Derrick Rose, Carlos Boozer, Luol Deng, Joakim Noah, and Taj Gibson.
• The next seven players on the roster make $15.8mm this season ($1.8mm per player).
• The adjustments arethe re-signing of Luol Deng at his current salary in the summer of 2014.

Rose and Gibson are almost certainly staying put. Noah, Deng, and Gibson are arguably reasonable price tags for their production and contribution to the team's defensive identity. That leaves out Boozer. If Boozer is amnestied this summer, that could save the Bulls $79mm over two years in luxury tax payments. Given the timing of Derrick Rose's injury and recovery, the play of Boozer this season, and the general health of the Eastern Conference, the Bulls may be letting a key piece of a conference finalist (Boozer) go this summer.

CONCLUSIONS

It's pretty clear that the new luxury tax rules will have a meaningful effect on the way teams are constructed. First, they discourage excessive spending. Teams like the 2009 and 2010 Orlando Magic are less likely to happen: a team with a perceived title window that spends in excess of $90mm on team salaries. Under the old luxury taxes, that team would cost roughly $110 million. Starting next year, it would cost $134 million. With "repeater" penalties, it would cost $153 million. Most, if any, organizations would probably be unable to pay that amount year after year and make money.

Second, these rules may encourage teams to lower short term payroll. Based on the simple math above, five teams will pay $242 million in luxury taxes next season. The league has mandated at least 50% will go directly to non-taxpaying teams. That means that, next year, 25 teams get checks for roughly $4.8 million if they stay below the tax line. In 2015, that number is $6.1 million, before repeater taxes and revenue sharing are added in (note: none of my numbers include any repeater tax penalties).

Bottom line: the new math of the NBA is changing the way teams are built. Maybe the league's elite organizations become the only true players, maybe parity spreads. Maybe player contracts shrink as owners mull the tax costs, maybe theyballoon as owners' pockets are lined with luxury taxes and increased revenue sharing. The one thing that seems clear at this point: owning an NBA team may be more profitable than ever (at least to them, them, and them).