Why Are Only Luxury Teams Willing to Pay the NBA Luxury Tax?

Andre Roberson, drafted 26th overall in this year's NBA draft, signed with the OKC Thunder for only 80% of the scaled Rookie Salary set forth in the CBA, whereas many team pay 120% and the associated luxury tax.

The answer to this is simple: small market teams – no matter how loyal their fan base or how well the team performs in terms of actual basketball, and not just a financial statement bottom line – may not be able to afford keeping up with the escalated levels under the revised NBA Collective Bargaining Agreement.  Let’s take the most recent instance of this, involving the signing of Andre Roberson by the Oklahoma City Thunder for 80% of the Rookie Salary Scale.  The Rookie Salary Scale is a benchmark by which rookie salaries are set based on the player’s overall selection in the draft.[i] For the 26th overall pick of the 2013-14 NBA Draft, where Roberson was selected by the Minnesota Timberwolves, that scaled number was $925,700[ii] … various media outlets report that he got $740,560.

As an additional kick to the stones, the CBA actually allows for a Rookie Exception to the Salary Cap, whereby “a team may sign its first-round draft pick for up to 120% of his Rookie Salary Scale amount”[iii], and in fact, this 120% has become almost standard across the league despite the Luxury Tax implications.  Beginning with the upcoming 2013-14 season, however, luxury tax rates for exceeding the Salary Cap increase – whereas the penalty since the new CBA became effective for the 2011-12 season, has been $1 for each $1 in excess of the Salary Cap, an incremental penalty scale initiates this season, according to Figure 1 below[iv].

As of now, the Thunder trail the $71,600,000 luxury tax threshold by $1,224,490 for the upcoming season.  The Oklahoman reports that “despite recent maneuvers that would suggest otherwise, Thunder management isn’t opposed to dipping into the tax.  They’re just concerned about avoiding it this year.  Because starting next season and for the foreseeable future, with the escalating contracts of its star players, OKC is all but guaranteed to violate that threshold.”[v] Understandably, the Thunder also want to avoid being subject classification as a luxury “repeat taxpayer” as set forth in the last paragraph of Figure 1, leading to higher penalties.

Still, this begs the question whether “small-market teams”, a label that I am hesitant to even use because of its regional pomposity, can compete from a financial standpoint with teams like the Los Angeles Lakers and New York Knicks, located in the two most populated metropolitan areas in the United States.  The Thunder have managed to put together unbelievable draft success and have produced some excellent squads with comparatively young players, sometimes before commanding maximum deals.  Since moving to OKC, the franchise has not had a major free agent signing akin to a Dwight Howard, and has in fact had to part with one of the league’s most prominent stars (James Harden) for financial reasons.  Other smaller franchises have not been as fortunate, and without the added revenue benefits of playoff appearances covering for a lower geographic footprint, the luxury tax is cause for concern.

Paying the full 120% of the Rookie Salary Scale is not unprecedented.  As SB Nation writer Ryan Rosenblatt stated, “In 2010, the Memphis Grizzlies tried to sign Xavier Henry for 100 percent of the scale plus incentives, but Henry held out and the Grizzlies eventually relented and offered 120 percent of the scale. The Chicago Bulls also refused to give Marcus Teague the traditional 120 percent last summer.”[vi] Still, these seem to be exceptions to the trend, and the Rookie Salary Scale carveout is only one of the numerous exceptions to the Salary Cap.

Let’s put this most recent instance in perspective: Roberson will not starve as a 21-year old with a six-figure salary slightly lower than the six-figure salary another franchise may have been willing to provide, and no one is playing a fiddle for him.  Furthermore, the guy is joining a team that could easily make the NBA Finals and is surrounded by some of the best talent (and theoretically, mentors) in the league.  But this is not an argument for an individual player; rather, it is an analysis of the effect of league standards and their overall fairness.  If the NBA’s Salary Cap setup, with all of its exceptions and taxes, ends up materially benefitting certain franchises over others as the taxes continue to increase throughout the upcoming years, there is a reasonable argument that the NBA system is hardly better than a MLB system without a cap that allows the Yankees to be the Yankees year after year.  If the NBA Salary Cap creates material unfairness across the league, we could see yet another nightmare-laden period of negotiations for a new CBA when the NBA and NBPA have the option to terminate the existing one around this time in 2017.

[i] CBA-10: Highlights of the 2011 Collective Bargaining Agreement Between the National Basketball Association (NBA) and the National Basketball Players Association (NBPA), (hereinafter, “CBA-101”), prepared by the NBA, September 2012, at page 17.

[ii] See CBA-101, Exhibit A.

[iii] CBA-101, at page 6.

[iv] From CBA-101, at page 19.

[v] http://newsok.com/okc-thunder-thunder-management-trying-to-avoid-luxury-tax-for-one-more-season/article/3867018

[vi] http://www.sbnation.com/nba/2013/7/26/4561098/oklahoma-city-thunder-andre-roberson-contract

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