This will serve as the introduction to the Collective Bargaining Agreement walkthrough. The goal here is to get you up to speed on the inter workings of the league that determine how things are run on a daily basis. I want to start here, because businesses are based on revenue and spending. The NBA is now different and the way things run starts with the amount of money the league is making and goes from there. It only makes sense that this walkthrough series uses this fundamental principle of business as the foundation. This was covered a bit in the "Laying the Foundation" post from July, but this will be slightly more in depth.
Disclaimer, I am not the originator of this information, I am merely doing research on certain aspects of the CBA, and simplifying them for easy consumption. I'm sure you don't have the time nor want to take the time to read the entire CBA, so this series of posts at BCB will strive to provide you with information pertaining to the most important areas of the agreement for you to learn as pass on. A fanbase that is in touch and educated on the game of basketball is a fanbase that will do a great job contributing to the integrity and strength of the National Basketball Association. (Credit for most of this information goes to Larry Coon and his spectacular CBA FAQ website. Head there if you just have to know every single small detail of the league.)
With all that being said, let's dive right into arguably the most important concept of the CBA and sports in general: The salary cap.
Most specifically, the luxury tax component of the salary cap. We all know that every major sports league operates under a salary cap system that acts as a restraint for team spending. It encourages teams to be somewhat frugal with the incredible amount of revenues they obtain every year. As much as we'd like to believe professional franchises are super frugal, they're really not at the end of the day. Not when it comes to building a legitimate championship contender. Talented young players in the NBA are to front office what that shiny new Mercedes is to us. We've all been there. You just saw ten advertisements for the latest model while watching reruns of the bachelor. What you own is enough...until it isn't. There's always room to improve and separate yourself from the pack. In sports, the margin of error is so slim, one broken play or turnover can be the difference between hoisting up the Larry O'Brian trophy in June and taking the walk of shame back to a distraught locker room. This drives executives to shell out handsome sums of money for that Free Agent coming off of a career year. Once they pass a certain predetermined threshold in spending, they incur penalties.
The math related to how much a team owes in taxes can get pretty completed, but just know that it acts on a tiered system which punishes team payroll a certain amount the farther they venture into the tax territory. As far as how this "threshold" is calculated, it really depends on how much money the league is projected to make in a given season and this term is commonly referred to as Basketball Related Income. Obviously if the league is flourishing, they raise spending limits. If you were to get a better paying job or received a promotion, you would probably be less strict wit the limits you spend in spending. Obviously, this is a vary general example and can fluctuate and a variety of variables. The penalties range from $1.50 in taxes each dollar spent to $4.75 in taxes per dollar spent. The tax level was set at $119,266,000 last season and the Cavs were penalized the most with $50 million going to taxes alone. Tristian Thompson ($16.4 million), JR Smith ($14.7 million), George Hill ($20 million) and Kevin Love ($24.1 million) were the biggest contributors to this huge total. Now a teams luxury tax payment is fluid until the regular season ends. A team has the whole season to make moves to duck under the tax if they so choose. It's worth noting that exceptions are not counted towards the final total. (For more information on exceptions, check out the intro blog post mentioned previously.) Other adjustments come into play before the total is finalized.
These principles will be covered in future walkthrough posts.
It wouldn't make sense for a team like the Warriors to attempt this, since they're so far over the tax. In their case, the benefits of going over outweigh the penalties they'll face when it's over. Pretty easy to see why. Conversely, with a team like Milwaukee, they are not realistically in the hunt for a championship, so management for the Bucks trimmed off some salary to achieve a final salary payment of $116.2 million in 17-18, which put them around $3 million under the luxury tax line.
The origin of the Luxury was covered in the intro post over at the blog, so check that out for a short history lesson on the matter. As far as how this implantation is working out so far, it seems to be a success. The Milwaukee example goes to show that teams really are weary of this penalty and are not looking to pay more than they have too. Even teams like the Rockets and Warriors have been somewhat shaken by the money they are shelling out to keep their title contenders in one piece. Houston ownership might have been so afraid in fact, that it cost them Trevor Ariza, a key rotation member in their fight against GSW not too long ago. He got $15 million from Phoenix, and it's doubtful that Clutch City was as willing to hand over the cash. Ultimately, this tax number looms large over the league and even owners flush with money are thinking twice before opening up the pocket books. The Warriors core is intact for now, but Klay's free agency in 2019 and Draymond's the following year threaten to take it all away.
That fact alone is more than the league could have hoped for when this rule was introduced.