The NBA announced that the salary cap and tax levels will take a huge jump for the 2015-16 season, increasing by 11% and 10.3% respectively. Here is the full memo:
The National Basketball Association today announced that the Salary Cap has increased by 11% to an all-time high of $70 million for the 2015-16 season. The tax level for the 2015-16 season increased by 10.3% to $84.740 million.
The Salary Cap and tax level go into effect at 12:01 a.m. ET on Thursday, July 9, when the league’s “moratorium period” ends and teams can begin signing free agents and making trades.
The minimum team salary, which is set at 90% of the Salary Cap, is $63 million for the 2015-16 season.
The current Collective Bargaining Agreement provides for three different mid-level exceptions depending on a team’s salary level. The non-taxpayer mid-level for this season is $5.464 million, the taxpayer mid-level is $3.376 million and the mid-level for a team with room under the Salary Cap is $2.814 million.
There are a number of immediate considerations here, the biggest of which is free agency. As of midnight, teams were able to start signing players to all of those deals you have heard about for the past week. Notwithstanding players going back on their word, all of those deals were agreed upon under an assumption, but not exact knowledge, of what the 2015-16 salary cap would be. It’s sort of crazy that deals are agreed upon without this very important knowledge, but that’s the way things work.
This season the salary cap was $63.1 million, and earlier this year the NBA projected that the 2015-16 cap would be $67.1 million. But just last week Ken Berger reported that the 2015-16 cap could be as much as $2 million higher than that projection, and now it has actually risen to $70 million, $3 million higher. So teams had a pretty decent guess of what the salary cap would be, but they most likely underestimated how high it would go.
Since teams likely underestimated the cap, the job for general managers and capologists just got a lot easier. For a team like San Antonio to sign LaMarcus Aldridge; re-sign Kawhi Leonard, Danny Green, Manu Ginobili, and Tim Duncan; trade Tiago Splitter; and renounce Marco Bellineli, Aron Baynes, and other players; and fit it all under the salary cap legally, they have to do things in precisely the correct order. For instance, Danny Green has reportedly agreed to a contract starting at $10 million next season. But his cap hold, an accounting trick that is on the Spurs’ books until they either renounce Green or re-sign him, is only $7 million. So the Spurs are going to technically re-sign him after they sign Aldridge, to use that extra $3 million in space for Aldridge. They can then exceed the salary cap to re-sign Green because they own his Bird rights.
With a higher salary cap than expected, these kinds of financial gymnastics are much easier to perform. If Ken Berger’s report had turned out not to be true, and the Spurs had wheeled-and-dealed under the assumption of a $69 million cap that turned out to be $67 million, they would be royally screwed.
For players who will sign max contracts this offseason—LeBron James, Kevin Love, Marc Gasol, Jimmy Butler, Kawhi Leonard, DeAndre Jordan, LaMarcus Aldridge—they just got a bit richer. Their max contracts aren’t actually a set dollar amount, but a percentage of the salary cap. Depending upon how long they have played in the league (and a couple other factors for young players), max contracts are between 25% and 35% of the salary cap.
For Jimmy Butler, for instance, the first year of his max contract under a $67.1 million salary cap would have been about $15.7 million. But under the $70 million salary cap, it is $16.4. That’s a $700,000 difference this year, a $750,000 difference next year (Butler gets 7.5% raises each year) and so on. All told, a $3 million raise in the salary cap nets Jimmy Butler $4.3 million more over the five-year life of his contract. The numbers are a bit different for each of the above players, but a small change in the salary cap is earning all of them some big bucks.
Besides the salary cap, the tax level also rose. It was projected to be $81.6 million, but will actually be $84.74 million. Exceeding the luxury tax limit in the NBA is extremely consequential, and the higher limit will save some teams tens of millions of dollars. This can be illustrated using the Brooklyn Nets.
Right now they’re on track to have projected salary obligations of $102,079,033 next year. This will certainly change as they sign, cut, and trade players—and the only number that matters is a team’s salary obligation on the final day of the season—but let’s assume this number is perfect. With the tax level set at $84.74 million, the Nets are $17,339,033 over.
This doesn’t mean the Nets owe an additional $17,339,033, because it isn’t a dollar for dollar tax. Instead, the penalties escalate for every $5 million a team is over. So they pay $1.50 for every $1 on the first five million dollars (up to $7.5 million total), $1.75 for every $1 on the second five million dollars (up to $8.75 million total) etc.
But for the Nets, they pay even greater incremental penalties. Because the Nets paid the luxury tax in 2012-13, 2013-14, and 2014-15, when they exceed it again in 2015-16 they will have to pay what is known as the repeater tax. Instead of starting at $1.50 for every dollar, their tax rate will start at $2.50 for every dollar. All told, if everything stays the same, the Nets will have an estimated $53.7 million tax bill.
But if the tax level was set at $81.6 million instead of $84.74 million, the Nets would be $20,479,033 over. If that were the case, their tax bill would be $67.3 million. So a tax level set $3.14 million higher will save the Nets about $14.4 million. There are a number of other teams—the Cavaliers, Warriors, Heat, and Thunder immediately come to mind—that will certainly be tax payers, and for them this is an extremely welcome development.
There are a number of other ripple effects here. Some teams that would be right at the salary cap or luxury tax limit now have some extra room to play with; the salary cap exceptions teams are allowed to use (the mid-level exceptions mentioned in the memo, as well as the not mentioned) are affected by which limits they are over; some free agents might be able to get a little bit more money than they initially agreed upon, and a number of other things. But the CBA is too big to recount them all, and these are the big ones.