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Nets Avoid Paying Luxury Tax

With rosters close to being set, it appears that a record number of teams will have to pay a luxury tax this season unless they can somehow get under the tax threshold by the trading deadline. Right now, that doesn't include the Nets who got under the threshold with Monday's trade.

Taking Hoopshype's unofficial payroll numbers as a benchmark, it looks like nine or more teams will be over the tax threshold once rosters are sorted out by opening night, and they could pay a total of about $75 million in taxes, a 25% increase over last season when only five teams paid $55.6 million in taxes.

Like last year, the Knicks will probably pay the most, an estimated $21.3 million. That's down from $45.1 million. Following closely behind are the Mavericks at $18.1 million, the Nuggets at $11.6 million, the Celtics at $8.6 million, along with the Sixers, the Heat, the Suns, and the Timberwolves, still over in spite of trading Kevin Garnett. In addition, the Cavs could be over once the final contracts are signed. Some teams may be able to get close to or under the threshold, like the Heat who have several partially guaranteed and non-guaranteed deals.

Beyond avoiding the dollar-for-dollar tax on all salaries above the threshold, GM's and their employers realize that there is a second benefit if a team stays under the threshold. Those teams who don't have to pay the tax also get a portion of the taxes collected from those who do. With an estimated $75 million in tax money in the pool come next July, the more frugal teams will each get about $2.5 million. Non-paying teams each get a 1/30 share of the luxury tax pool.

The Nets appear to be just under the tax threshold after trading Mile Ilic and Bernard Robinson for David Wesley. The payroll is now at $67.36M, about $490,000 below the tax threshold $67.85, according to an estimate by Dave D'Alessandro of the Star-Ledger. That figure includes a partial guarantee to Robert Hite (about $25,000) and and buyouts for Cliff Robinson ($500,000) and Wesley ($250,000) once he is waived. It also includes vets minimum deals for for Darrell Armstrong and Malik Allen. Neither have been signed to fully guaranteed deals but it would be a huge surprise if they weren't. (Although Allen will make just shy of $1 million and Armstrong about $1.22 million, the Nets will only have to pay $770,000...the league pays the rest of any vets' minimum out of its own funds. Only the $770,000 counts against the salary cap and luxury tax threshold).

Assuming the Nets paid the Hornets the difference between what was owed Ilic and Robinson and the Wesley buyout--about $1.7 million--to facilitate the trade, the deal gave the Nets roster flexibility and an opportunity to cash in on their payout from the luxury tax pool. Of course, they avoided paying the luxury tax as well, which would have cost them about $1.2 million. So the Nets saved about $2 million on the deal: $1.2 million they wouldn't have to pay in luxury taxes + $2.5 million in payments from the luxury tax pool - $1.7 million paid the Hornets.

The Nets may have moved now knowing things would be tight down the road. About 19 of the 30 NBA teams are within $5 million of the tax threshold. With so many teams that close to the tax, it will be difficult for teams to get under the threshold at the trade deadline, the last chance to avoid the tax. The Nets for example were more than $2 million over the tax threshold in each of the past two years, but were able to get under by trading unwanted players, Marc Jackson and Linton Johnson III in 2006, and Jeff McInnis in 2007, to teams way under the threshold. There are fewer teams with that kind of cushion any more.

One reason is that a number of aging NBA stars were bought in recent years and their old teams are still carrying the pro-rated buyout amount on their books. Among them, Michael Finley of the Spurs, who the Mavs are still carrying to the tune of $18.6 million this year; Chris Webber of the Pistons (?), who the Sixers are carrying at $19 million and Stevie Francis of the Rockets, who the Trail Blazers are carrying at $16.4 million.