The Luxury Tax: Who’s Paying, Who Gets Paid

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In signing Andrei Kirilenko, the Brooklyn Nets are paying the San Antonio Spurs around $4.2 million per year. That’s oversimplifying a lot of things, but that’s an absolute ton of money to be giving up.

 
That’s because when the 2011 NBA lockout finished, the new collective bargaining agreement laid out new rules for the luxury tax rate, and the Nets, under new owner Mikhail Prokhorov have become one of the worst offenders. The way the new CBA works however though, they’re being punished by effectively paying each team under the cap the value of one Matt Bonner.

To get there, let’s take a look at just how the luxury tax works.

The Luxury Tax
The NBA’s salary cap is at $58.679 million. This got figured out back in 2011. The cap isn’t fixed – it’s based on league wide revenues based on what the league pulled in in the previous season. The thing is, teams can easily exceed the cap, through Larry Bird exemptions, and semishady sign-and-trade deals. So in addition to that soft cap, there’s a luxury tax level.

For every dollar over the luxury tax level a team is, they have to pay $1.50 in luxury tax. Sounds simple, right? Not so much. After the first five million, they pay $1.75 in tax. After $10m, it’s $2.50 per dollar over the cap.   It’s a cumulative punishment, and repeat offenders have to pay even more than that.
 
 

In picking up Andrei Kirilenko, the Nets have bumped their projected payroll up to over $100 million – meaning the Nets are forking over $80 million in luxury tax to Stern and the League. The reality is that AK-47’s $3.18 million comes closer to costing the Nets $16.7 million, once you consider what luxury taxes the Nets have to pay.

Worst Offenders
The Nets are hardly the only offenders – though they are this year’s worst. Other teams that are expecting to shell out include Chicago, Miami, the Lakers, Orlando, Portland, and of course, the Knicks – regular cap criminals. A very rough estimate says these teams are paying out another $86 million in luxury tax. Combined, we’re talking $160 million in luxury tax the league is raking in.

How is the Tax Spent?
Here’s the big deal. About half of the tax is redistributed to teams under the tax level, as a sort of incentive to spend responsibly, and a reward for not being massive overspending lunatics. So teams like Toronto, San Antonio, and lowly Milwaukee are cashing in, getting around $4.2 million per year in tax payouts from the league.

The Real Cost

The real cost of the AK-47 signing isn’t just his $3.18 million in salary, or the $16.7 million hit the Nets are taking on the balance sheet. No, the big hit is the fact they’re gifting teams $4.2 million each year, they wouldn’t ordinarily have. That’s free money – and effectively enough for teams to sign a Matt Bonner. Or half a George Hill.
 

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