FanPost

The Raptors and the Luxury Tax

With the downtime preceding the active portion of the NBA offseason, I figured I'd take the opportunity to address what may be a key consideration for the Raptors in the coming months.  After reading many posts from passionate Raptor fans, I often observe the sentiment that fans would like the Raptors enter the realm of successful teams.  By that, I obviously mean the NBA elite - and the path laid out leads directly through the NBA's luxury tax territory.

 

The point of contention for many fans is that ownership (MLSE) is not allowing the franchise to spend the amount of money necessary to enable success.  However, my contention is that the issue is far from that simple - from an ownership perspective, and team perspective.

 

There are two basic arguments supporting entering the luxury tax.

1) Spending more money to add players theoretically improves your roster.  It's difficult to disagree with this notion, as the worst any addition can do is sit at the end of the bench and have no effect on your team.

2) Teams willing to pay the luxury tax are generally successful.  If you spend into the luxury tax, your team is likely to be successful as well.

 

Here is a nice chart courtesy of Larry Coon's Salary Cap FAQ:

Season Tax Level Taxpaying Teams (amount paid in $millions)
2005-06 $61.7 million* Knicks ($37.2), Mavs ($17.3), Magic ($7.8), Pacers ($4.7), Grizzlies ($3.7), Spurs ($0.9)
2006-07 $65.42 million Knicks ($45.1), Mavs ($7.2), Nuggets ($2.0), T-Wolves ($1.0), Spurs ($0.2)
2007-08 $67.865 million Knicks ($19.7), Mavs ($19.6), Cavs ($14.0), Nuggets ($13.6), Heat ($8.3), Celtics ($8.2), Lakers ($5.1), Suns ($3.9)
2008-09 $71.150 million Knicks ($23.7), Mavs ($23.6), Cavs ($13.7), Celtics ($8.3), Lakers ($7.2), Blazers ($5.9), Suns ($4.9)
2009-10 $69.920 million

 

This list includes 5 of the last 8 NBA Finals participants, and the list will expand to 7 of 10 at the conclusion of this season.  There is a definite correlation with higher payroll teams and success, but I would propose, and many would agree that good players are the key to winning - not a high payroll.  Good players simply cost more money than bad.

That explains why many teams on this list are outperformed by teams not on this list.  The runner-up Cavailers entered the luxury tax for two years and failed to have the same level of success in either season in the tax.  The Knicks have been the biggest payer on this list and one of the worst teams in the NBA for this period.  The Mavericks have had one finals run (and possibly would have won but for the refs), but have not really threatened in any other season before or after despite a gigantic payroll year after year.  Now, there are rumours of Maverick insolvency.  Despite a recent change in fortunes, I suspect that the Magic, Grizzlies, and Pacers of 05-06 were non-playoff luxury tax teams.

 

Now, I'd like to address some specific reasons why entering the luxury tax can be counterproductive, and how this rationale applies to your Toronto Raptors.

 

Entering the luxury tax is not a simple decision.  The way that the NBA's financial structure is designed, teams in the luxury tax will pay a dollar for dollar tax once they exceed the calculated threshold.  In addition to paying this penalty, the team is also exempt from taking part in the league-wide redistribution of this tax.  Therefore, the thought of exceeding the threshold by a nominal amount instantly becomes a multi-million dollar proposition.

 

The sheer cost of adding a player in luxury tax territory is simply prohibitive.  As stated previously, merely entering the luxury tax results in a multi-million dollar loss of revenue.  Next, will be the doubled cost of adding any incremental contributors to the roster.  Now, I don't want to promote tight-fisted ownership that undermines the team (the Clippers are the NBA's most profitable franchise by staying near the salary floor).  However, fans need to be realistic about $300+ million franchises, and the expectation of profit that today's owners have to have.  Through the 80s, 90s, and 00s, franchise values have increased astronomically as new revenue streams have been exploited.  Losing a couple of million per year is insignificant when your franchise value is growing by hundreds of millions of dollars.  But with franchise values in all of the major sports reaching maturity, either the current owners must more than just profit, but also  a reasonable return on their investment.  Or else, the inevitable will happen and the next owners will find a way.


Now that is is established that sports franchises have a right to try and earn themselves a profit, as do any other businesses, is it reasonable that MLSE does not pay luxury tax?  This is itself, quite a large question.

Could MLSE have paid the luxury tax in the 09-10 season?  As Jarrett Jack's contract took up nearly all of the MLE, the Raptors were forced to use the LLE (bi-annual exception) to sign Rasho Nesterovic for 2m.  Currently, Hoopshype lists the Raptors' payroll at 67.9m, while Larry Coon's FAQ lists the threshold at 69.9m.  This means that the threshold was generally unattainable (not that reaching it is an accomplishment in itself).


Is MLSE willing to spend the luxury tax in future seasons?  Brian Colangelo has suggested that they are, and my recollection is that he has tied this statement to Bosh returning.  It could theoretically be a mostly empty statement used to placate the fans.  Bosh may have already decided not to return and MLSE may know or suspect this, meaning that MLSE is now off the hook though they never were on it in the first place.  As any attempt by me to judge Bosh & MLSE's intention is conjecture, I would tend to take MLSE at face value.  They will spend the luxury tax when it is deemed to be appropriate.  I believe this is the correct approach, as GMs will rarely show the restraint necessary to save rather than spend.

 

Now that we have removed MLSE as an obstacle, we can assume that the luxury tax will be exceeded in appropriate situations.  We need to the effects of exceeding the luxury tax from a front office/team perspective.

What type of team can best afford to pay luxury tax?  The one that makes a deep playoff run, of course - with the supplement of NBA playoff gate, TV, and merchandise revenues.  Considering the huge financial strain the luxury tax puts on an owner, is it any surprise that Danny Ferry has resigned after failing to reach the Finals for two straight tax seasons?  It seems then, that a successful season for a team $10+m into the luxury tax (enough to add a near all-star level player), would be at the very least a conference finals appearance.  To reach the top 2 in your conference, this means realistically being a top 4 team before a well-fitting acquisition of a $10m player.

Conversely, which type of team should not pay luxury tax?  The type of team that would be unlikely to reach a conference final, and most certainly any team that will have plateaued before that point.  In order for these types of team to break through, they will need to either retool or rebuild.  What type of contracts do teams need to spend $80m?  Large ones.  Large annual salaries are also generally also accompanied by years (hello, Hedo).  This is exactly the opposite of what you will want in a retooling/rebuilding effort.  Expiring contracts are the NBA's great currency for retooling, and are equally useful to a rebuilding effort if patiently allowed to expire.

So let's suppose we have a top-4 team in the conference.  What types of players can we add?  Being over the cap, the free agency route only allows for the MLE.  This means adding a role player, who will hopefully the 4th best or lower on your team.  Last year, these were players like Artest, Sheed, Varejao, and Ariza.  This type of player can really only put a team that is very close to the top, over the top.  It could be possible to hit on a Chauncey Billups scale, but is unlikely.  This is because most players with enough experience to reach FA will be locked in by their own teams, or will be dealt while they have value.

 

And then, we have the trade route.  What types of players would you expect to get in a trade?  Well, NBA trades first need to be matched by relatively equal salaries.  Secondly, you are looking to get the better current player in the trade.  But keep in mind that teams will only trade you the current contributors that don't fit into their long-term plans or are overpaid for their current use.  Is it really possible to significantly improve a team by taking overpaid players, but trading back dollar for dollar?  Here are some of the players who have been traded in the offseason recently: Shaq, Richard Jefferson, Vince Carter, Jamal Crawford, Zach Randolph.  These players should be, at best, your 3rd option.  Aside from flukish trades that Boston made (Allen, Garnett), it will be difficult to acquire quality second options.  However, 2nd/3rd options and below are plentiful at high prices each offseason.


If a team wants to make the most of entering the luxury tax, it would behoove them to save the value of its expiring contracts until the trade deadline.  Teams can either keep these contracts to expiration, or deal them at the deadline.  The Lakers' deal for Gasol turned them from a middling playoff team into this playoff juggernaut and actually looks fair at this point.  In some more realistic depictions of trade deadline additions, useful specific players like Caron Butler, Brendan Haywood, Marcus Camby, and Kevin Martin were made available.

What should be taken from this though, is that big names are rarely made available, and teams can either hope another GM gives up, or put the work in to find their own star to form a pair.  This means that the pair must be found before a team approaches luxury tax territory (payroll<60m).  A wise GM would then use the luxury tax availablility to complement his already capable group of players and fill in holes.

Getting back to the Raptors, if anyone can explain to me how a 40 win team minus Chris Bosh has the necessary building blocks in place (2 star minimum) to contend, I'm all for getting into the tax.  Until then, we as fans should exhibit some patience, being quiet as possible so Colangelo doesn't feel forced into making another "all-in" move.

 

Apologies for the wall of text and increasingly poor wording as I fall asleep.

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