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NBA Luxury Tax Reality Check

NBA owners constantly act and talk like they need to avoid the league's luxury tax like the plague. The hoops media and fans alike seem to have it deeply ingrained in their minds that the luxury tax is an enormous "fine" of some sort. Both parties of non-billionaires routinely make curious excuses for owners who make silly basketball decisions all to avoid the luxury tax. Even funnier is how some of the biggest NBA fanatics and media personnel vicariously live through these billionaire owners and feel like they're the ones opening their wallet or saving money during salary dumps.

So what exactly is the luxury tax? And what exactly was the dollar total gifted to NBA owners who avoided this luxury tax this past season?



Jump for a look into the NBA's Luxury Tax...

Longtime GSoM friend Henry Abbott breaks this down over at ESPN True Hoop in The Silver Lining of the Salary Cap Cloud, which is an excellent piece worthy of a full read:

Luxury Tax Disbursements to 23 Teams
You probably know about the NBA's luxury tax. A refresher: Teams pay one dollar to the NBA for every dollar they spend in salary in excess of a certain amount, which we now know was $71.15 million this past season. That means seven teams will pay, and they are, as Stein reports:

New York ($23,736,207), Dallas ($23,611,661), Cleveland ($13,707,010), Boston ($8,294,664), Los Angeles Lakers ($7,185,631), Portland ($5,899,356) and Phoenix ($4,918,136).

The other 23 teams, however, each get 1/30th of that money back, in cash. That means the 23 teams not listed above are each about to get $2,911,756, which is not a bad little shot in the arm.

The Knicks are an outlier for several reasons (they're essentially one little line in the bigger balance sheet for Cablevision), so let's focus on the other 6 squads who paid the luxury tax. All of them were quality squads. Only one of the six missed the playoffs. But at 46 wins in the Wild Wild West with a star-studded roster that lost Amare Stoudemire for half a season the Phoenix Suns have a pretty good excuse for sitting at home and counting lotto balls with the Golden State Warriors. The teams paying the luxury tax aren't fools. They're putting out a good basketball product and unlike Chris Cohan's Golden State Warriors aren't one of the perennial laughingstocks in this league.

Also, you read right that the teams which avoided paying the luxury tax received a (relatively) measly $2.9 million (not $9 million or $30 million or $60 million or $60+ million) from the NBA for staying under the luxury tax. In NBA terms that's nothing, but a nice little pat on the back.

Putting this into context $2.9 million is in the NBA is roughly:

  • what swingman Thabo Sefolosha made last season playing for the OKC Thunder
  • a little more than half of the average NBA salary
  • the amount of money raked in simply from parking fees at 20 games at the Oracle
  • a 5 bedroom house in Palo Alto (Bay Area real estate is still nuts!)

Managing your team's payroll and salary cap in the NBA obviously makes great fiscal sense. Spending for the sake of spending is foolish. Overpaying and outbidding on players can make for some great shock value- especially your own (I'm looking at you Toronto with Andrea Bargnani). Winding up chained to some poor long term contracts is foolish (Hello D-troit with Charlie Villanueva and Ben Gordon!). We know this. We're not fools... unlike some of the yes-men that have been working in the Warriors front office for the past decade and a half.

However, avoiding the luxury tax like the plague at the expense of improving your on-court product to rake in a measly $2.9 million- that's equally foolish. Telling your fans you can't pay the luxury tax and you're dependent on the league's annual "stocking stuffer" to teams under the tax is very funny. Sure that additional money over the luxury limit will cost you double your money which can be tough to swallow. But if it's going to get you to the playoffs or deeper into the playoffs and help your team build a stronger winning brand as part of a longterm vision (which Cohan's Warriors simply don't have), then that seems like money well spent. Playoff games give teams and their brands national and even worldwide exposure in addition to increased hometown revenue. Winning is a box office smash hit (unless you're the San Antonio Snores of course who couldn't even sell out some Western Conference Finals home games back in 2007 against the Utah Jazz).

If you're a big market team (like the Warriors) avoiding the luxury tax like the plague if there's opportunities to improve your on court product and get the Bay buzzing anywhere near it was during WE BELIEVE makes very little sense. The last thing any of us should want to hear from this incompetent organization is how they can't pay the luxury tax and desperately need that cash back gift, which wasn't intended for big market teams with a rabid fanbase packing the house regardless of The City being replaced with The Suck in the first place.

The luxury tax and missing out on that luxury tax gift should never be used as an excuse for Cohan's perpetually poor product.