Luxury Tax Penalties Under New CBA

December 6 2012 at 5:22pm CDT By Luke Adams

One of the new additions to the NBA's most recent Collective Bargaining Agreement was increased penalties for teams in the luxury tax. Those more punitive penalties haven't taken effect yet, but the rates for taxpaying teams will increase in 2013/14, with a "repeater tax" introduced starting in 2014/15.

Up until this point, teams have been required to pay an extra $1 for every dollar they spend over the tax threshold ($70.307MM in 2011/12 and 2012/13, though it figures to increase going forward). If a team is $8MM over the tax line at the end of the regular season, the club will take a penalty of $8MM, meaning that extra salary actually costs them $16MM overall. Beginning in 2013/14, however, tax penalties will be assessed as follows:

  • $0-5MM above tax line: $1.50 penalty per dollar.
  • $5-10MM above tax line: $1.75 penalty per dollar.
  • $10-15MM above tax line: $2.50 penalty per dollar.
  • $15-20MM above tax line: $3.25 penalty per dollar.
  • For every additional $5MM above tax line, rates increase by $0.50 per dollar (ie. $3.75 for $20-25MM, $4.25 for $25-30MM, etc.)

Under the new system, a team $8MM over the tax line will be charged $1.50 per dollar for the first $5MM, then $1.75 per dollar for the next $3MM, for a total penalty of $12.75MM.

Penalties for taxpaying teams can also increase even more if a club has been in the tax for multiple years. These penalties will apply to teams that have been in the tax for four years in a five-year period (beginning in 2011/12). So teams who remain in the tax every year starting in '11/12 will face increased rates starting in 2014/15.

The "repeater tax" increases the rates listed above by $1 each. So the hypothetical team that's $8MM above the tax line would be charged $2.50 per dollar for the first $5MM, then $2.75 per dollar for the next $3MM. The club's total penalty would be $20.75MM, meaning it would cost $28.75MM overall to exceed the tax threshold by $8MM. Obviously, the cost would be exponentially more exorbitant for teams further above the tax line.

These looming penalties explain why we'll see teams try to avoid being in the tax over the next few seasons. The most prominent examples so far have been the Mavericks' decision to break up the 2011 champions, and the Thunder's decision to trade James Harden rather than extend him, but those are just the first of many cases. As Ian Thomsen of SI.com writes, even teams like the Heat may be in danger of having to break up their rosters within the next few years.

To retain LeBron James, Dwyane Wade, and Chris Bosh, along with a roster of lesser-paid role players in 2014/15, the Heat would likely to have to pay $140MM+ for 12 players, Thomsen estimates. That's why one rival general manager predicts that the Heat are "going to have to break up their team." Another GM thinks only three clubs will be able to afford the massive penalties that the repeater tax will bring: the Lakers, Knicks, and Nets.

2012/13 is the final year that teams will be penalized under the old CBA's rules, so it's not likely that we'll see a ton of teams manoeuvering to avoid the tax before next summer. However, going forward, it figures to be a major consideration when clubs add salary and build their rosters.

Note: This is a Hoops Rumors Glossary entry. Our glossary posts will explain specific rules relating to trades, free agency, or other aspects of the NBA's Collective Bargaining Agreement.

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