Luxury Tax 101 and how it affects the Boston Celtics 2018-2019 season

From



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

18. What is the "luxury tax?" Why does it exist? How is it determined? Who pays it?

http://www.cbafaq.com/salarycap.htm#Q18

The luxury tax is a mechanism that helps control team spending. While it is commonly referred to as a "luxury tax," the CBA simply calls it a "tax" or a "team payment." It is paid by high spending teams -- those with a team salary exceeding a predetermined tax level. These teams pay a penalty for each dollar their team salary (with a few exceptions, see below) exceeds the tax level.

The tax level is determined prior to the season, and is computed by taking 53.51% of projected BRI (see question number 12), subtracting projected benefits, and dividing by the number of teams in the league (1). The tax level may be adjusted from there, based on what happened during the previous season:

• If the league didn't pay the players enough the previous season, i.e., if they had to cut the players a supplemental check to make their guarantee, then the shortfall, divided by the number of teams in the league (1), is added to the tax level. For example, if the players are paid $90 million less in 2017-18 than they are guaranteed, then the 2018-19 tax level is adjusted upward by $3 million.
  

• If there is an overage -- i.e., if the players were paid more (pre-escrow) than their guaranteed share in the previous season -- and the system is getting close to exceeding what the league can get back through the escrow system, then the tax level (and salary cap) may be reduced in order to put on the brakes (see question number 17 for more information).
  

Teams pay an incremental tax rate based on their team salary as of the team's last regular season game, and whether the team is a "repeat offender," i.e., whether they were also taxpayers in at least three of the four previous seasons:



For example:

• A team with a team salary $12 million over the tax level pays a tax of $21.25 million (the incremental maximum of $7.5 million for $0 to $4,999,999, plus the incremental maximum of $8.75 million for $5 million to $9,999,999, plus $2 million times the incremental rate of $2.50 for $10 million to $14,999,999).
  

• A team that was a taxpayer in three of the four previous seasons, with a team salary in the current season $4 million over the tax level pays a tax of $10 million ($4 million times the repeater rate of $2.50 for $0 to $4,999,999.
  

When determining the amount of tax a team owes, the league uses its team salary (see question number 13) on the date of its last regular season game (i.e., if a player is traded away before the end of the season, then none of his salary is taxed), with the following adjustments:

• Cap holds and exceptions are ignored.
  

• Any "unlikely bonuses" (see question number 74) that were actually earned are added to the team salary.
  

• Any "likely bonuses" (see question number 74) that were not earned are subtracted from the team salary.
  

• Any trade bonuses (see question number 99) for players received in trade after the last regular season game are added to the team salary. This amount may be pro-rated -- see question number 100 for details.
  

• Any amounts from settlements of grievances are added to the team salary.
  

• For players who signed as free agents (i.e., not draft picks) under the current CBA, and make less than the two-year minimum salary, the minimum salary for a two-year veteran is used in place of their actual salary. (2)
  

• For minimum salary players whose salary is partially paid by the league (see question number 22) only the amount paid by the team (the two-year minimum salary) is taxed.
  

Here are the tax levels in each season, and the teams that paid the tax:



My note: The tax level for season 2018-2019 has not been determined yet

In addition to the financial penalties, a number of restrictions are placed on taxpaying teams, which are described in question number 20.
Where does the tax money go? This is described in question number 19.

Footnotes:

1.  All formulas that divide by the number of teams in the NBA (currently 30) ignore any expansion teams in their first two seasons in the league.

2.  If a player in this situation was non- or partially-guaranteed and waived prior to Jan 10 (when all contracts become guaranteed for the remainder of that season), his salary is taxed at the two-year veteran minimum salary, pro-rated for the number of days the player was on the roster. For example, if the player's contract was terminated on the third day of the regular season, his salary for tax purposes is 3/177 of the two-year veteran minimum salary.

In another thread (or two), I suggested that we trade Morris to dump his salary so that we can slightly overpay Smart and stay out of the luxury tax.

Others (swish) have said that "19 of the 30 champs and runner-ups since the Luxury tax has been in force have paid a luxury tax."  While that may be true, since the new 2017 Collective Bargaining Agreement, the penalties have become much stronger at each level.

If we decide to sign Dwight Howard to a vet min salary, as many would like to see, his entire salary doesn't count.  From above: "only the amount paid by the team (the two-year minimum salary) is taxed."

My point is this, if we can avoid the Luxury Tax for one more season, we should.  We can have our cake and eat it too!

gyso

KDP,

You seem to have a firm grasp on our current salary cap level and what is included. If you would like to add that info here so that we can see how close to the luxury limit we are, that would be great.

I am going to dig into it a bit as well.

Thanks,

gyso

Updated 07/12/2018

http://www.basketballinsiders.com/boston-celtics-team-salary/

Updated 07/12/2018

http://www.spotrac.com/nba/boston-celtics/cap/

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Updated 07/12/2018

http://www.spotrac.com/nba/boston-celtics/cap/

(2 of 3)

Updated 07/12/2018

http://www.spotrac.com/nba/boston-celtics/cap/

(3 of 3)

I just posted this on another thread.  I am posting it here just to add to the overall information in this thread.

If a team receives a player in a sign and trade, it is hard capped at the Apron, which is now just over $6M above the luxury tax level.
Here is some info on both topics:

92. Can a free agent be signed and immediately traded?

http://www.cbafaq.com/salarycap.htm#Q92



20. Other than financial penalties, are there restrictions on taxpaying teams? What is the "Apron?" What is the hard cap?

http://www.cbafaq.com/salarycap.htm#Q20



There is more under each section beyond the screenshots I inserted.  Please use the links provided for more on each topic.

dboss wrote:gyso

Could the Celtics use the traded player exception rule in a deal to trade Smart.

Could they take back a lower salaried players plus a trade exception amount?

dboss,


FAQ #26 seems to say that we can get a traded player exception and renounce it. That would eliminate some salary and maybe drop us back under the tax limit.

So if you want to get a lower salary useful player back, plus the TPE and renounce the TPE, it sounds likely that it is allowed.

Use the link above for FAQ #20 and scroll down. Let me know how you interpret it.

gyso

dboss wrote:

gyso wrote:

dboss wrote:gyso

Could the Celtics use the traded player exception rule in a deal to trade Smart.

Could they take back a lower salaried players plus a trade exception amount?

dboss,


FAQ #26 seems to say that we can get a traded player exception and renounce it.  That would eliminate some salary and maybe drop us back under the tax limit.

So if you want to get a lower salary useful player back, plus the TPE and renounce the TPE, it sounds likely that it is allowed.

Use the link above for FAQ #20 and scroll down.  Let me know how you interpret it.

gyso

I must have missed that part about being able to renounce the TPE.  I saw where it has to be used within a specified period of time or you lose it.

Second paragraph, example. Third paragraph, second sentence. "So in the example above, . . . "

Latest update after Smart Signing:

http://www.basketballinsiders.com/boston-celtics-team-salary/

Latest update after Smart Signing:

https://www.spotrac.com/nba/boston-celtics/cap/

Save $4M plus the tax somehow by saying goodbye to Yabu and Nader, please.

As we currently stand, there are 15 players under contract and we are over the luxury tax line by just over $3M.  Everyone is fully guaranteed, except Nader.

Nader is not fully guaranteed, but part of his salary is: $450,000.  Releasing him saves less than $1M off of team salary, so then signing Bird to a regular NBA contract uses up all that savings and a bit more.  It is not a even salary swap, Nader out and Bird in.

With Smart's finalized contract, we will see how the team management deal with our being over the luxury tax limit:

1. Do nothing and take our entire team as is through the entire regular season and into the playoffs.

2. Trade Morris before the deadline to free up a roster spot, get under the tax line and leave some flexibility to pounce on a opportunity at that time or after a player gets released and goes through waivers.  This allows the Celtics the luxury of seeing how our injured players return, if any new injuries crop up and also allows us to take our strongest team through half of the season before making a decision.

3. Trade Morris this summer to free up a roster spot, get under the tax line and leave some flexibility to pounce on a opportunity when it becomes available.  I believe that we can take a TPE in the trade to make salaries match and renounce it at any time before the end of the season.

gyso

worcester wrote:Save $4M plus the tax somehow by saying goodbye to Yabu and Nader, please.

I do not think that that combo adds up to enough, with Nader's partial guarantee.  Definitely not if the team wants to add Bird.

The only acceptable way is with Morris.  We will now have to see if they pick Door #1, Door #2 , Door #3 or some other door that we cannot see at this time.

Our dear departed Sam would always write something like, "Let the ownwrs worry about paying the salaries and taxes. Danny's job is to put the best team on the floor."