The CBA Glossary

The Luxury Tax Threshold

Since 2001, as a result of the 1998 lockout, the NBA has operated an escrow and tax system related to the net spend on player salaries. The tax, colloquially named the "luxury tax", serves as an extra charge for teams that spend more on their payroll, and redistributes the excess to the teams that pay less, in a bid to curb excessive spending and ensure that money is distributed appropriately between players and owners.

a “Tax Level” equal to one hundred twenty-one and one-half percent (121.5%) of the Salary Cap for such Salary Cap Year;

In the early days of the luxury tax, it was more speculative and less punitive. Tax was only charged in seasons in which the league-wide salaries and benefits paid exceeded 61.1% (recurring) of all basketball-related income (hereafter BRI); the Collective Bargaining Agreement sought to limit player payroll spending to 55% of BRI, with the escrow system (which withheld 10% of player salaries) designed to correct any overspend. The tax only kicked in when the escrow system alone was insufficient to redress the balance. In the 2001/02 and 2004/05 seasons, salaries and benefits did not exceed the 61.1% threshold, and therefore no teams paid any luxury tax, no matter how sizeable their payroll was. (This was a great relief to the New York Knicks in particular, a prolific spender at the time.)

However, in those early days, a further complication was the fact that the threshold for when teams would start to pay luxury tax was retrospective, and based on a precise calculation of a season’s BRI that could only be done after the season ended. Because of this, teams had to operate on where they estimated the tax threshold would be, only to be subsequently charged based on where it actually was. It is for this reason that the first two seasons had until last year seen the two highest overall tax payments, of $173,313,440 and $157,212,990 respectively, with a record 16 teams paying it in that first season. (One of the 16, the San Antonio Spurs, were off only to the tune of $187,000 with their estimate, which was nevertheless enough to put them in the luxury tax and cost them a full share of the redistributed tax payments, worth roughly $15 million.)

Nevertheless, as the system developed over time, the guesswork was taken out of it. As of the 2005 Collective Bargaining Agreement, the luxury tax threshold is now automatically implemented every season, and the specific threshold amount is also determined in advance based on a league estimate of BRI.

As above,

With the tax threshold at the time based on a precise calculation of a season's Basketball Related Income that could only be done after the season ended, teams had to operate on where they estimated the tax threshold would be, only to be subsequently charged based on where it actually was. Not until the 2005 NBA Collective Bargaining Agreement was the system changed to the much more sensible set-up, that remains today, in which a season's tax threshold is set in stone before any games take place.

What Goes Into Tax Threshold Proximity Calculations

In NBA luxury tax calculations, rookies or sophomores who sign minimum salary contracts are counted differently; the minimum salary of a two-year veteran is used in place of their actual salary in tax and apron calculations. This prevents teams from saving on tax bills by signing cheap youngsters, thereby protecting the employability of veterans. Therefore, while signing a rookie to a one-year minimum deal would cost the team $1,017,781 in salary, the contract would count as $1,836,090 in the calculations for how far over the team was, and the assessed penalties would also be levied against that latter amount.

However, the exception to this rule comes when that young player is signing as a draft pick. Under that circumstance, their contracts are counted as normal - if signing a draft pick to the minimum salary, the $1,017,781 figure is used for both salary and tax. And when paying a $6.5-to-$1 repeater tax rate on every dollar spent, that $818,309 difference essentially becomes a $5.3 million difference.

“Tax Team Salary” means, for a Team for a Salary Cap Year, the Team’s Team Salary as of the start of its last Regular 180 Article VII Season game occurring within such Salary Cap Year, calculated by the Accountants in the same manner as Team Salary is calculated by the Accountants for purposes of computing Total Salaries and Benefits in the Audit Report: (A) plus all Incentive Compensation excluded from Salary under Section 3(d) below but actually earned by the player during such Salary Cap Year; (B) minus all Incentive Compensation included in Salary under Section 3(d) below but not actually earned by the player during such Salary Cap Year; (C) plus, with respect to any trade that occurs following the conclusion of the Team’s last Regular Season game, the portion of any trade bonus earned by a player that is included in the Team’s Team Salary for such Salary Cap Year; (D) plus any amount that is added to the Team’s Team Salary for such Salary Cap Year following the start of the Team’s last Regular Season game pursuant to Section 4(a)(1)(iii) below; (E) minus fifty percent (50%) of any reduction made to a player’s Compensation as a result of a suspension by the NBA (but not by a Team); and (F) plus, with respect to a Standard NBA Contract between a Team and a Free Agent with zero (0) Years of Service or one (1) Year of Service, the amount (if any) by which (x) the Minimum Player Salary that would be applicable to a player with two (2) Years of Service as set forth in the Minimum Annual Salary Scale for the Salary Cap Year in which such Free Agent was signed (or in the event such Free Agent’s Contract is terminated during the Regular Season, the Minimum Player Salary that would be applicable to a player with two (2) Years of Service as set forth in the Minimum Annual Salary Article VII 181 Scale for the Salary Cap Year in which such Free Agent was signed, reduced pro rata to reflect the player’s post-termination Salary), exceeds (y) the Salary attributable to such Standard NBA Contract. For the purposes of this Section 2(d)(1)(i)(F): (1) a Standard NBA Contract between a Team and a Two-Way Player (either signed pursuant to Article II, Section 11(h), or the result of the exercise of a Standard NBA Contract Conversion Option) will be deemed to be a “Standard NBA Contract between a Team and a Free Agent” provided that such Two-Way Player’s Two-Way Contract was: (i) signed by the player as a Free Agent; or (ii) the result of the exercise of the Two-Way Player Conversion Option provided for in the Exhibit 10 of a Contract that he signed as a Free Agent; and (2) a Standard NBA Contract between a Team and a player under a 10-Day Contract (signed pursuant to Article II, Section 9(g)) will be deemed to be a Standard NBA Contract between a Team and a Free Agent provided that such 10-Day Contract was signed by the player as a Free Agent.

Tax Rates

In the tax's early years, the luxury tax was paid at a dollar-for-dollar rate.

(i) Standard Tax Rates: Incremental Team Salary Above Tax Level Tax Rate for Increment 2023-24 and 2024-25 Salary Cap Years Beginning with 2025-26 Salary Cap Year $0 - 100% of Tax Bracket Amount $1.50-for-$1 $1.00-for-$1 100% of Tax Bracket Amount - 200% of Tax Bracket Amount $1.75-for-$1 $1.25-for-$1 200% of Tax Bracket Amount - 300% of Tax Bracket Amount $2.50-for-$1 $3.50-for-$1 300% of Tax Bracket Amount - 400% of Tax Bracket Amount $3.25-for-$1 $4.75-for-$1 400% of Tax Bracket Amount and Over Tax rates increase by $0.50 for each additional 100% of Tax Bracket Amount above the Tax Level (e.g., for Tax Team Salary 400% of Tax Bracket Amount to 500% of Tax Bracket Amount above the Tax Level, the Tax rate is $3.75-for-$1 for that increment). Tax rates increase by $0.50 for each additional 100% of Tax Bracket Amount above the Tax Level (e.g., for Tax Team Salary 400% of Tax Bracket Amount to 500% of Tax Bracket Amount above the Tax Level, the Tax rate is $5.25-for-$1 for that increment). 184 Article VII (ii) Repeater Tax Rates: Incremental Team Salary Above Tax Level Tax Rate for Increment 2023-24 and 2024-25 Salary Cap Years Beginning with 2025-26 Salary Cap Year $0 - 100% of Tax Bracket Amount $2.50-for-$1 $3.00-for-$1 100% of Tax Bracket Amount - 200% of Tax Bracket Amount $2.75-for-$1 $3.25-for-$1 200% of Tax Bracket Amount - 300% of Tax Bracket Amount $3.50-for-$1 $5.50-for-$1 300% of Tax Bracket Amount - 400% of Tax Bracket Amount $4.25-for-$1 $6.75-for-$1 400% of Tax Bracket Amount and Over Tax rates increase by $0.50 for each additional 100% of Tax Bracket Amount above the Tax Level (e.g., for Tax Team Salary 400% of Tax Bracket Amount to 500% of Tax Bracket Amount above the Tax Level, the Tax rate is $4.75-for-$1 for that increment). Tax rates increase by $0.50 for each additional 100% of Tax Bracket Amount above the Tax Level (e.g., for Tax Team Salary 400% of Tax Bracket Amount to 500% of Tax Bracket Amount above the Tax Level, the Tax rate is $7.25-for-$1 for that increment). Example: In respect of the 2023-24 Salary Cap Year, the Tax Bracket Amount is $5 million. Assume that Team A is subject to the Standard Tax Rates, and Team A has a Tax Team Salary that Article VII 185 exceeds the Tax Level by $15 million. Team A would pay a Tax of $28.75 million (i.e., $5 million times $1.50, plus $5 million times $1.75, plus $5 million times $2.50). Example: Assume that, in respect of the 2025-26 Salary Cap Year, the Tax Bracket Amount is $6 million, Team B is subject to the Standard Tax Rates, and Team B has a Tax Team Salary that exceeds the Tax Level by $15 million. Team B would pay a Tax of $24 million (i.e., $6 million times $1.00, plus $6 million times $1.25, plus $3 million times $3.50). Example: Assume that, in respect of the 2026-27 Salary Cap Year, the Tax Bracket Amount is $6.5 million, Team C is subject to the Repeater Tax Rates, and Team C has a Tax Team Salary that exceeds the Tax Level by $15 million. Team C would pay a Tax of $51.625 million (i.e., $6.5 million times $3.00, plus $6.5 million times $3.25, plus $2 million times $5.50).

The "repeater" tax

The first challenge any franchise has is to build a good team. The second challenge is to keep it good. The first challenge is hard enough that about 20 franchises fail at it every season. The repeater tax is a direct and emphatic attack upon the second.

Beginning in,

Each Team whose Tax Team Salary exceeds the Tax Level for any Salary Cap Year shall be required to pay a tax to the NBA. For each Salary Cap Year, the tax shall be calculated: (A) using the applicable rates in Section 2(d)(2)(i) (“Standard Tax Rates”) for any Team whose Tax Team Salary did not exceed the Tax Level in three (3) or more of the four (4) Salary Cap Years immediately preceding such Salary Cap Year; and (B) using the applicable rates shown in Section 2(d)(2)(ii) (“Repeater Tax Rates”) for any Team whose Tax Team Salary exceeded the Tax Level in three (3) or more of the four (4) Salary Cap Years immediately preceding such Salary Cap Year

Under the first two seasons of this CBA, the luxury tax rates stayed the same as they were under the previous one. Teams paid $1 for every dollar they were over the luxury-tax threshold, and there was no repeater tax in force. As of this year, the rates of tax have changed, depending on how far over you are. These incremental ranges go from a $1.50/$1 dollar ratio from teams up to $5 million over, up to $3.75-$1 for teams between $20-$25 million over and increasing by an extra $.50 for every extra $5 million over that.

These rates are incremental. If you are $25 million over the tax, you don't pay $3.75 for every dollar you are over the tax, but instead only for every dollar more than $25 million over the tax, plus the appropriate rates for all increments up to that one. Confusing though it may be, the point is apparent: Teams considerably over the tax are going to really, really pay for it.

How the repeater tax would empty more money out of Mikhail Prokhorov's pocket. And as of next season, this will be even further true. Teams susceptible to the repeater tax get $1 extra added to each dollar of tax that they would otherwise pay. The aforementioned incremental ratios therefore would become $2.50/$1 for teams up to $5 million over and up to $4.75-$1 for teams between $20-$25 million over. (See the full calculations at the bottom of this piece.)

We will witness in the two coming seasons that stiffening up the tax penalties will break the monotony of teams spending far in excess of the tax repeatedly, and will continue to prevent many teams from going over it at all. If there is going to be an exception, it will be Brooklyn, but even the Nets will feel a distinct pinch.

In the long run, this makes the prioritization of youth and cheap basketball assets an ever greater priority than before. This, ultimately, is how good teams will remain good. Good teams cannot, unless they are blessed with ridiculously rich owners unfazed by significant operating losses (much more significant than ever before), just pay the price to stay together anymore.

Tax rebates

see Where The Money Goes

WHAT THE CBA ACTUALLY SAYS

1. What the salary cap is From why we're even here, to the difference between a hard cap and soft cap.
2. Fundamental salary basics Guarantees, proration, maximum raises/decreases, 10-day contracts, roster sizes, etc

MAIN TAKEAWAYS:

Links:

1. A Complete History of NBA Luxury Tax Payments