NBA tax may soon be a luxury Lakers can’t afford
Let me tell you how it will be,
There’s one for you, 19 for me,
‘Cause I’m the Taxman
It won’t be long before $128 million doesn’t buy the Lakers what it used to.
Like, by next season.
This season, that amount will cover the 2012-13 payroll and associated luxury taxes for a roster dripping with superstars Dwight Howard, Kobe Bryant, Steve Nash and Pau Gasol.
A year from now, it could pay for only a portion of that same roster and maybe a pair of Bryant’s high-end sneakers. Keeping the core of the Lakers together could cost nearly $200 million.
Thanks, new collective bargaining agreement.
NBA owners who like to pair eight-figure player salaries with their caviar are bracing for the party pooper known as more punitive luxury taxes, set to arrive in the 2013-14 season. Designed to expand the league’s middle class and reduce the number of bloated contracts, the tax may force big spenders such as the Lakers to reconsider just how much they are willing to lavish on star players.
Then again, Jerry Buss has never been known to skimp on headliners, much less parade confetti, in his 33 years as Lakers owner.
“My feeling is that we’ll continue to pursue the top players in the league,” Lakers General Manager Mitch Kupchak said. “There will always be an emphasis on having the franchise be able to survive and prosper.”
Even so, the cost of success is about to go up … and up … and up.
This is the last season the Lakers will pay a dollar-for-dollar penalty for exceeding the luxury-tax threshold, meaning that their league-high payroll of $99.2 million will cost them an additional $28.9 million in taxes, because that’s how far they are above the $70.3-million tax level. The tax will raise the tab for their player costs to $128 million.
Starting next season, the tax burden gets significantly heavier. NBA teams must pay a $1.50-to-$1 ratio for the first $4.99 million they are over the luxury-tax threshold, a $1.75-to-$1 ratio for being $5 million to $9.99 million above the threshold, a $2.50 ratio for $10 million to $14.99 million over, and a $3.25 ratio for $15 million to $19.99 million beyond the threshold.
Teams that are $20 million or more over the tax level accrue additional penalties, increasing by 50 cents per dollar for every $5 million.
Those extra pennies can add up to millions, particularly for teams with multiple all-stars.
“All of these penalties are designed to try to change behavior and the thinking of the people that make the decisions and to try to make the cost of making the decisions outside the parameters more painful,” said Peter Guber, co-owner of the Golden State Warriors. “How it will play out, you never know until you see it whether it changes the culture as well as the metrics.”
The Lakers already have $79.6 million committed to eight players for the 2013-14 season. Assuming they re-sign Howard next summer to a maximum contract that calls for him to make $20.5 million in the first year, that bumps the Lakers payroll over $100 million.
If their final payroll was $105 million, that would put them $32 million over the league’s projected tax threshold of $73 million, triggering a tax of $94.5 million and putting the team on the hook for a staggering total of $199.5 million — a 55.9% increase over the total for this season with essentially the same group of core players.
“The prohibitive luxury tax makes it so only the super-rich are going to be able to continue to spend at their current levels,” said Larry Coon, an independent expert on the collective bargaining agreement who is also an IT director at UC Irvine, “so you’re going to end up with a couple of haves and a lot of have-nots.”
Mitigating the Lakers’ financial outlay to some extent will be the team’s 25-year, $5-billion deal with Time Warner Cable that is set to pay the team roughly $120 million in the first year of the broadcasting rights deal, which starts in the 2012-13 season. That is the type of deal smaller-market teams can’t match.
Kupchak pointed out that the Lakers also will pay a portion of the Time Warner deal back to the league in revenue sharing, but that is a trade-off most teams would happily make.
The Lakers have one untapped financial tool at their disposal, designed to help teams reduce their luxury tax burdens: the so-called amnesty clause. It allows teams to waive one player, paying his salary while being relieved of the associated tax costs.
The only Lakers who can be waived via the amnesty clause per league rules are Bryant, Gasol, Metta World Peace or Steve Blake. That makes World Peace the most likely candidate to be cut because the erratic small forward is owed $7.7 million in 2013-14, when he will be 34.
Whether to waive World Peace could be a $31-million question for the Lakers. That’s the amount Coon estimated the team could save in taxes by severing ties to World Peace and replacing him with a player making the league minimum salary.
So long, World Peace? Not necessarily.
“We haven’t used it for a reason and that’s because we like this team,” Kupchak said of the amnesty clause. “We think this team could win and that’s what this organization wants to do. If at some point, we’re not winning and players aren’t performing, we’ll look at our options.”
The Lakers must also decide whether they are willing to be considered repeat offenders in the eyes of the league’s tax collectors. Beginning with the 2014-15 season, teams that were taxpayers in each of the previous three seasons will activate a “repeater tax,” an additional dollar-for-dollar charge tacked onto existing penalties.
The only Laker under contract two seasons from now is Nash, giving the Lakers some time to figure out their fiscal philosophy. By then, they could face previously unfathomable issues such as whether they can afford to re-sign Bryant without asking the longtime face of the franchise to take a steep discount.
General managers throughout the league are already having to be more mindful of payroll and the manner in which they construct their rosters. The collective bargaining agreement places greater restrictions on the salaries taxpaying teams can receive in trades, takes away certain exceptions that allow them to sign free agents and will eliminate their ability to receive players via sign-and-trade deals starting with the 2013-14 season, giving even free-spending teams less flexibility.
“I think the competitive issues are more impactful than the money,” Dallas Mavericks owner Mark Cuban wrote in an email. “No sign and trades and other limits can really hurt how [you] build a team.”
Ultimately for the Lakers, the urge to hoist banners may trump the desire to raise profits.
“Whenever I’ve talked to [Buss] about a budget, it’s always kind of, ‘Well, Mitch, we have a budget, but tell me who you’re thinking about and I’ll tell you if I want him,’ ” Kupchak said. “So yes, the budget and tax threshold is something we’re going to pay attention to, but he’s always understood the value and allure of a superstar and a team that wins.”
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