• Hunter Parsons

Hard-Capping the NBA: Unlikely and Unnecessary


[1]

On December 15, 2022, the National Basketball Association (“NBA”) and National Basketball Players Association’s (“NBPA”) current collective bargaining agreement (“CBA”), ratified prior to the 2017-18 NBA season, will likely reach its end.[2] While the agreement technically runs through the 2023-24 season, the two parties agreed on a mutual opt-out date that is now practically a month away.[3] Reports indicate that not only will the opt-out be exercised, but that a new CBA will be agreed upon, avoiding any future holdouts and giving the league a new agreement for the 2023-24 season.[4] One feature of the 2017 CBA was that it enhanced teams’ abilities to sign players and increase payrolls. Yet, according to NBA insider Adrian Wojnarowski, the NBA has now begun pushing to restrict team spending via an “upper spending limit” on team salary.[5] Though team spending may be uneven, hard-capping the entire league is an unnecessary measure.

Over the last few years, increased team spending has been a very real occurrence.[6] However, before looking into recent spending history, it is important to understand the NBA’s current tax system. Prior to each season, the NBA establishes a luxury tax threshold (“Tax”), set at around 21.5% higher than the Salary Cap.[7] The purpose of the Tax is simple: restrict team spending through the threat of increasing monetary penalties for every dollar spent over the limit.[8] The Tax for the 2022-23 NBA season is $150,267,000.[9] Additionally, in order to further discourage high spending, if a team has spent over the Tax in three out of the last four seasons (not including the current season), tax rates increase relative to the “Repeater” tax, rather than the standard “Non-Repeater” tax.[10]These rates are: [11][12]



Under the current system, a conditional hard cap already exists.[13] Certain teams may be hard-capped at the Tax “Apron” which, for this season, sits at $156,983,000.[14] However, for a team to be hard-capped at the Apron (only for the rest of that season), one of three things must happen:[15]

  1. The team acquires a player via a Sign-and-Trade

  2. The team uses their Mid-Level Exception to sign a player to a contract larger than allowed by the Taxpayer Mid-Level Exception

  3. The team uses the Bi-Annual Exception

If a team commits none of these acts, they may theoretically spend as much money as they would like, so long as doing so is compliant with the CBA. Herein lies the NBA’s concern. All teams are subject to the same Salary Cap, giving each team relatively the same payroll.[16] However, any amount spent above the Tax comes out of that team owner’s pocket.[17] Because some owners are worth billions more than others, an immediate advantage results for the wealthiest owners’ teams who are willing to spend.[18]

Looking at the history of league spending reveals that teams’ willingness to dip into the Tax has grown. In the 2016-17 NBA season, only two teams spent a combined $15.5M over the then-Tax of $113,287,000.[19] Over the last three seasons, an average of eight teams have finished the season in the Tax.[20] This season, 10 teams find themselves in the penalty, the most in any year since the inception of the Repeater tax in 2011.[21]


However, what troubles the league most is the depth at which teams have been dipping into the previously dreaded tax penalty. From 2011 to 2021, the average tax bill was around $20M per taxpaying team.[22] Over the last two seasons, the average has jumped to nearly $70M.[23] This season, the Golden State Warriors are on track to finish with a Repeater tax bill of $170M, tied with their total last season as the largest tax bill in NBA history.[24]


Furthermore, following the recent contract extensions of Jordan Poole and Andrew Wiggins, the Warriors are now looking at an estimated tax bill in the 2023-24 season of nearly $269M.[25] Once added to their $215M payroll, the Warriors will spend a grant total of at least $484M on the 2023-24 roster alone.[26] For context, the current Warriors ownership group purchased the team in 2010 for $450M.[27]


The NBA worries that allowing this “limitless” spending for rich franchises completely diminishes the league’s competitive balance. However, not only has history proven this theory not to be true, but large tax bills are beneficial for the league, including those teams with much smaller payrolls. The ten largest tax bills in NBA history have been laid out below:


[28]

Since the inception of the Repeater tax in the 2011-12 season, the team with that season’s largest tax bill has won the NBA championship only twice: the Golden State Warriors in 2022 and the Cleveland Cavaliers in 2016.[29] Over the other nine seasons in that span, seven out of the nine teams with the largest tax bills did not make it to the NBA Finals.[30] Further, the revenue generated through tax bills can ultimately help teams under the Tax. According to the current CBA, up to 50% of the proceeds from the collected tax may be distributed evenly to the non-taxpaying teams.[31] Although, the other 50% is used for “league purposes,” which has recently been to fund the league’s revenue sharing program.[32]


Through this program, teams contribute an equal percentage of their revenue into a common pool, then receive in return a 1/30 share of the pot.[33] Therefore, teams with less revenue (partially due to smaller payrolls) receive more money than they contributed.[34] Either way, the money finds its way back to the teams, with the non-taxpaying or poorer teams seeing the biggest checks.


The gap between the Golden State Warriors’ $170M tax bill and the San Antonio Spurs’ nearly $72M in tax room this season is understandably shocking. Nevertheless, there has yet to be a clear pattern of massive tax bills correlating to consistent team success. Additionally, the teams who do not delve as deep into the Tax as others are still given a share of the rewards felt by those who are willing to spend. For that reason, it is unnecessary that this change be included in the coming CBA. Regardless, the NBPA has justifiably been resistant to the concept, going so far as to call a hard cap a “nonstarter” in negotiations.[35] Nothing will be conclusive until the December 15 deadline, but it is likely the luxury tax system will live on for years to come.

References: [1] https://e00-marca.uecdn.es/assets/multimedia/imagenes/2018/10/17/15397523154610.jpg [2] Shams Charania, Shams: Where NBA CBA talks stand, plus new issues on Players Association agenda, The Athletic (September 19, 2022), https://theathletic.com/3607549/2022/09/19/shams-nba-cba-negotiations/ [3] Id. [4] Id. [5] Adrian Wojnarowski, Sources: NBA pursuing upper spending limit in new agreement with NBPA, ESPN (October 28, 2022), https://www.espn.com/nba/story/_/id/34896826/sources-nba-pursuing-upper-spending-limit-new-agreement-nbpa [6] NBA Team Luxury Tax Tracker, Spotrac.com (n.d.), https://www.spotrac.com/nba/tax/ [7] Larry Coon, Larry Coon’s NBA Salary Cap FAQ, cbafaq.com (n.d.), http://www.cbafaq.com/salarycap.htm [8] Id. [9] Spotrac, supra. [10] Coon, supra. Id. [12] Id. [13] Id. [14] Id.; Eric Pincus, Examining the NBA’s $123.7M Salary Cap for 2022-23, Sports Business Classroom (June 30, 2022), https://www.sportsbusinessclassroom.com/examining-the-nbas-123-7m-salary-cap-for-2022-23/ [15] Id. [16] Id. [17] Id. [18] Justin Birnbaum, America’s Richest Sports Team Owners 2022, Forbes (September 27, 2022), https://www.forbes.com/sites/justinbirnbaum/2022/09/27/the-richest-sports-team-owners-on-the-2022-forbes-400/?sh=76821e96c2c4 [19] Spotrac, supra. [20] Id. [21] Id. [22] Id. [23] Id. [24] Id. [25] Bobby Marks, Twitter (October 15, 2022), https://twitter.com/BobbyMarks42/status/1581398035547856896 [26] Id. [27] Angelina Martin, Magic reveals he turned down chance to buy stake in Warriors, NBC Sports (October 25, 2022), https://www.nbcsports.com/bayarea/warriors/magic-johnson-reveals-he-turned-down-chance-purchase-warriors-stake [28] Spotrac, supra; 2022 NBA Playoffs Bracket, ESPN (n.d.), http://www.espn.com/nba/bracket [29] Id. [30] Id. [31] Coon, supra. [32] Id. [33] Id. [34] Id. [35] Wojnarowski, supra.