NBA Free Agency: The Salary Cap Explained

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With the opening of NBA free agency last night at 12:01 A.M., teams are finally free to negotiate with players who are no longer under contract with another team.  The next couple of weeks are important, whether a team is hoping to add the last piece needed to become a contender for a championship or looking for a superstar to build around for years to come.  Historically, free agency has changed the course of teams, mostly for the better. In 1996, the Lakers signed Shaquille O’Neal away from the Orlando Magic and went on to win three titles. Three years ago in “The Decision”, Lebron James famously joined Dwayne Wade with the Miami Heat along with Chris Bosh, and went on to win two titles in three seasons.

Free agent signings can go wrong as well though. With a salary cap (spending limit) in place for teams, those who are are looking to improve sometimes overpay for a player and can be stuck with a ‘bad contract’ for years to come. In 2010, the Atlanta Hawks signed Joe Johnson to a six year, $119 million extension which left them unable to add any more pieces to a team that exited the playoffs in the first or second round five years in a row. Johnson proved not to be worthy of a maximum contract and the Hawks were finally able to trade him away last season to the Brooklyn Nets and are now in a position to sign two big name free agents in this years class.

Despite having room to sign free agents, teams now more than ever have to be smart when making decisions. The NBA Collective Bargaining Agreement (CBA) that went into effect last year, severely punishes teams who are over the salary cap after next season. Until now, the CBA penalized a team with a dollar-for-dollar ‘tax’. This means a team had to pay $1 for every dollar they were over the cap. While that sounds harsh, many organizations were willing to pay the tax, including the Lakers and Heat.

To further deter teams from exceeding the cap, beginning in the 2013-2014 season the tax will be far more punitive. Teams will be taxed as follows:

  • Portion of team salary $0-$4.99 million over tax level:          $1.50 for $1
  • Portion of team salary $5-$9.99 million over tax level:          $1.75 for $1
  • Portion of team salary $10-$14.99 million over tax level:      $2.50 for $1
  • Portion of team salary $15-$19.99 million over tax level:      $3.25 for $1
  • Rates increase by $0.50 for each additional $5 million of team salary above the tax level.

The new tax can be financially crippling to an organization and will deter many teams from signing players they might have in the past.

The new rules have already forced teams to make decisions they would likely not have made under the old rules. The Oklahoma City Thunder (OKC) traded away James Harden last summer. Harden was OKC’s third best player behind Kevin Durant and Russell Westbrook, but has gone on to star for the Houston Rockets along with Jeremy Lin. The Thunder simply could not afford to pay all three, when Harden’s contract was up. Lin is another example of a player traded away, likely due to the new rules.  Lin received a lot of publicity after performing well for a short stretch in the 2011-2012 season, however the Knicks were unwilling to exceed the salary cap and overpay for him.

In addition to discouraging teams from overpaying players, the idea behind the new CBA is to prevent organizations from creating a ‘superteam’ like the Miami Heat. The league would like to  ‘spread the wealth’ and force teams to be more creative to be successful. The new CBA puts an emphasis on getting the most for your money from a player.

Of course, there will still be teams out there willing to ignore the tax and continue to overpay players who don’t provide value in return. The Brooklyn Nets (yes, the same team that took on Johnson’s deal) behind Russian billionaire Mikhail Prokhorov, last week agreed to trade for aging superstars Kevin Garnett and Paul Pierce. Trading for Garnett and Pierce may pay off for a year or two but it’s unlikely to help in the long run. On the other hand, the Celtics received draft picks in return, which they can use to find young talent through the draft or use as trade assets for veteran players.

In any case, the NBA is getting what they want. The new tax is forcing teams to reconsider past signings (Chris Bosh?) and carefully weigh their options before doling out millions of dollars to players in the future. One thing is for sure, the next few weeks will be exciting to say the least!

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About Rajiv Radia

Rajiv is a third year law student at American University - Washington College of Law in Washington DC and a long time sports fanatic.
This entry was posted in General, NBA, Rajiv Radia and tagged , , , , , , . Bookmark the permalink.

6 Responses to NBA Free Agency: The Salary Cap Explained

  1. pred says:

    very interesting thank you!

  2. Joshua Greenfarb says:

    Sad.

    This doesn’t explain how the Lakers can seemingly spend as much as they want. They had a $100 Million payroll last season. AND, they still tried to re-sign Howard at over 20 Million per year.

    HOW COME YOU AVOIDED THE LAKERS IN THIS CRAPPY ARTICLE????????????

    Hahaha!

    It’s a conspiracy!! The Lakers must be cooking the books or something. People don’t want to address them … why is that? Certain people will get in serious legal trouble? What’s going on here?

    Someone needs to explain this more clearly. I could try to “google” to find clear answers as to why the Lakers get to break the CBA rules like all hell, but it’s not worth the time/effort. Therefore, someone needs to explain the Lakers’ ability to have over 100 Million payroll.

  3. Joshua Greenfarb says:

    You must be a Laker fan, which is why you choose not too address last season’s 100 Million payroll.

    Plus, people were talking like they had the ability to re-sign Howard, while “smaller market” teams apparently can’t spend this much money on players.

    The CBA is not working. Smaller market teams still suffer the most. Maybe more so than every before, actually.

    It’s pretty sad that the Lakers get to have double the payroll more than a team than, say, the Thunder or Grizzlies.

    Sad.

  4. Rajiv Radia says:

    Thanks for the comments, I am a Laker fan but did not write this with that in mind. After I wrote this article the NBA salary cap number for this season was released: $58.679 million. That being said, the tax threshold (the amount over which teams begin being taxed $1/$1 this year) is the more important number. This year that number has been set at $71.748 million. The Lakers have $80.56 million in guaranteed contracts for this season (8 players) and will likely be around $85 million once the entire roster is signed for the year. Therefore, the Lakers tax would come to around $24.8 million. Adding that to the approximately $85 million in salary, the Lakers will owe around $110 million for this years roster (as a Laker fan I wouldn’t pay a cent over the salary cap for a team that is likely going to finish 6-8 range if they make the playoffs at all).

    The general idea of the CBA is to deter the large market teams from exceeding the cap as the NBA cannot prevent teams from doing so under the CBA. In the end, the owners have to make a decision whether they want to pay large amounts of money to the NBA for their team. Obviously the larger market teams will still be more willing to do so but will be more reluctant to do so than they have been in the past. Getting back to the Lakers, the reason they were willing to sign Howard to a max contract is they only have one player, Steve Nash, under contract after this season. They have put themselves in a position to be able to put together an entirely new team after this season. In addition, teams are given a break for resigning their own players (the “Larry Bird Rule” as it’s called) which I won’t get into right now. Thanks again for the comments and hopefully that clears up the issues you pointed out.

  5. Pingback: What is the CBA and How Can MLB Suspend Alex Rodriguez for Violating It? | JD Sports Fan

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