The NBA Off Season Financial Juggling Act

By July 21, 2021 No Comments

Now that the NBA season has concluded teams begin the process of determining their off season moves in an effort to improve. It’s no surprise that these decisions are often largely financial in nature.

Salary Caps Explained

The Collective Bargaining Agreement (CBA) sets both a maximum and a minimum amount of money that teams can pay their players for each season. Because the NBA Salary Cap has exceptions that allow teams to exceed it and only pay a tax, it is often referred to as a “soft” cap.

There is also a salary minimum that requires teams to spend at least 90% of their Salary Cap on their players. The Salary Cap is calculated by multiplying projected Basketball-Related Income (or “BRI”) by 44.74%, less projected player benefits (like health and welfare benefits), and then dividing the result by the current number of NBA teams, which is 30.

The Luxury Tax Option

The main deterrent team owners face when trying to stack their rosters is something called the luxury tax. In the simplest terms, the luxury tax is an incremental tax team owners have to pay for their teams going over the salary cap. The higher over the salary cap they go, the higher the annual tax they have to pay. (For example, for the first $5 million that a team’s Team Salary exceeds the Tax Level, that team must pay $1.50 for every $1.00 they’re above the Tax Level.) The Tax Level is set each year by multiplying BRI by 53.51%.  Obviously, this can affect owners with less money in smaller markets, more than others.

NBA Salary Cap and Luxury Tax Projections

2021-2022: $112 million and $136.6 million

2022-2023: $115.7 million and $140 million

2023-2024: $119.2 million and $144.9 million

To prevent wealthier teams from abusing the system, the NBA reserves a higher tax rate for teams defined as repeat offenders who have paid luxury tax in at least three of the past four seasons. Still, there are a number of exceptions teams can leverage to stack their roster with talent without violating their salary cap. You can read about all of them here.