Whether you love or hate the Miami Heat, you ought to appreciate their runs at the championship over the next two seasons. Because owner Micky Arison may not be able to afford his team by 2014-15.
In that season the "repeater" tax will kick in, bringing with it the most gruesome financial penalties for high-payroll teams that the league has ever seen. The repeater tax threatens to change the way business is done in the NBA, and its first major victim could be the reigning champion Heat.
As its payroll stands today, Miami is committed to seven players in 2014-15 at a total cost of $78.4 million. The bulk of that guaranteed money is scheduled to go to LeBron James, Dwyane Wade and Chris Bosh, who will be paid $61.4 million altogether that season.
It's important to note that Miami's payroll for 2014-15 does not yet include low-salaried players who are crucial to its championship hopes -- contributors like Ray Allen, Shane Battier, Mario Chalmers, James Jones and Rashard Lewis, each a member of the Heat's current team. Those five players are making a combined $14.9 million this season.
Let's say that Miami, in order to remain in title contention in 2014-15, will add $14.9 million in cost-efficient role players to the seven men already contracted for that season. (The Heat may have to pay more than $14.9 million for similar complementary talent two seasons from now, but let's stick with that conservative figure for the sake of argument.) Here's what it means: If their ambitions remain high and they're able to keep costs as low as possible, then the Heat will be responsible for a payroll totaling $93.3 million -- and that's before the brutal impact of the repeater tax kicks in.
At the conclusion of 2014-15, the repeater tax will make its dreaded debut by punishing teams that have paid a luxury tax for four consecutive seasons. Miami is on a path to be hit with an enormous penalty in the summer of 2015.
As a repeat taxpayer, the Heat will be facing the highest incremental tax rates in NBA history. If, for example, the luxury-tax threshold is established at $75 million -- a highly optimistic gain of roughly $5 million from this season -- the Heat could be faced with a tax bill approaching $48 million. In total, they would be paying $141.3 million for 12 players.
"They're going to have to break up their team,'' predicted a rival general manager who has done the math.
Unless the NBA's financial circumstances improve over the next couple of years, Arison will be faced with two unhappy choices: The Heat could run a big deficit in 2014-15 to pursue the championship, or he could break up their winning roster by way of trades, amnesty or by not re-signing James, Wade or Bosh, should they exercise their options to become free agents in 2014.
If league revenues were to jump higher than expected over the next two years, the tax threshold would be raised accordingly and Arison might be able to find a way to escape with his team intact. But the NBA's TV contracts with ESPN/ABC and TNT don't expire until 2016, and league executives don't foresee major financial gains rescuing the NBA before the repeater tax takes effect.
The repeater tax was negotiated into the new collective bargaining agreement during the 2011 lockout. The owners were seeking a hard salary cap to limit costs. When the players insisted on a soft cap, harsher taxes became the owners' next-best remedy. In 2015-16, and for each season thereafter, the repeater tax will be levied against teams that are paying a luxury tax for the fourth time in the past five seasons. (To avoid the repeater taxes a team will have to dip below the luxury-tax threshold for two years over the course of a five-year window.)
It threatens to change the way championship teams are assembled. The idea of building a championship contender for a long-term run may no longer be a reasonable goal. Remember when Shaquille O'Neal and Kobe Bryant were criticized for allowing their feud to break up a dynasty that could have dominated the NBA for a decade? That kind of goal won't be in play for contenders who can't afford to pay the repeater tax.
Teams such as the Heat may be forced to voluntarily withdraw from title contention, even though James and Bosh will be at their peak while Dwyane Wade will be only 32 entering the pivotal 2014-15 season. Dallas owner Mark Cuban was criticized for not re-signing his players to defend their 2010-11 title, as championship teams traditionally do. But the new taxes have rendered that tradition untenable: Holding that team together would have led to unjustifiable penalties for a roster that was too old to remain in contention.
The goal for most franchises (including Cuban's Mavericks) will now be to avoid a luxury tax until they are positioned to win the championship -- because once the payroll crosses the tax threshold, the clock will start ticking down, and a contender may have only a three-year window of contention before the team must be broken up to avoid the repeater tax.
This has not been a big topic of discussion around the league because most teams aren't in position to deal with the repeater tax. Based on current payrolls, eight teams -- the Celtics, Nets, Bulls, Warriors, Lakers, Grizzlies, Heat and Knicks -- are over the tax threshold of $70.3 million for this season. The Warriors need to shave $1 million from their payroll to escape the tax. It would be money well-saved for Golden State, preventing it from entering the repeater window prematurely with its rebuilding roster.
The Nets' current $83.5 million payroll has put them on a path to pay a repeater tax in 2015-16, when they'll owe a combined $35 million in salary to Joe Johnson (who will be 34) and Gerald Wallace (33). Their expensive quartet of Johnson, Wallace, Deron Williams and Brook Lopez alone will be making $72.8 million that season, which means owner Mikhail Prokhorov will be faced with a repeater tax bill of more than $50 million. To look at it another way, the Nets will be under enormous pressure to prove the investment is worthwhile before the repeater tax confronts them in 2015-16.
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The repeater penalty is not the only source of fear for ambitious owners and their team executives. Franchises that cross the threshold are also going to be hit with an annual luxury tax that will be toughened next season. The current tax penalty for annual offenders is $1 for every dollar over the threshold. Next season the penalty jumps to $1.50 for every dollar above the threshold up to $4,999,999, with the tax rates climbing incrementally for each additional $5 million. Put it this way: The Lakers are facing a tax bill of roughly $30 million for this season; for next year, a payroll that includes a re-signed Dwight Howard and a roster filled out with minimum contracts could leave the Lakers with a preposterous tax bill approaching $95 million in what could be Bryant's farewell season.
Rivals will be watching closely to see how the Lakers react to total costs of $199 million in payroll and taxes next season. If they decide they can afford it, based on a local TV deal that pays them $150 million annually, other franchises will complain that this CBA once again enables the richest teams to buy championships at the expense of the not-as-rich.
"I see three teams that can potentially afford to pay the biggest taxes," one general manager said. Those teams are the Lakers, Knicks and Nets, and they could yet undermine the aim of the new system to create an even playing field.
The repeater tax has already influenced the title race. "You saw it in the James Harden trade,'' a rival GM said. "It was definitely a consideration there.''
Had Oklahoma City re-signed Harden at the rate for which he would sign eventually with the Rockets, the small-market Thunder would have been facing the heightened luxury tax next season with the potential of a repeater tax penalty for 2016-17. Under no circumstances could OKC afford the repeater penalties, which would have forced it to abandon its title hopes as Kevin Durant and Russell Westbrook enter their peak years. As it is, the Thunder will be up against the tax threshold next season and beyond even without having to pay an eight-figure salary to Harden.
The Thunder don't generate revenues that would enable them to afford excessive taxes. While Miami is a richer franchise, it can't sustain high tax payments either. This season, which is the last year of the old system, the Heat are budgeted to pay a tax bill of $13.9 million in addition to their $84.2 million payroll. Next season those penalties will more than double under the new system, unless Miami changes its payroll.
One GM who reviewed Miami's payroll suggested that the Heat could try to lessen their tax penalty or avoid it entirely by diminishing the rotation around their three stars. Among the potential moves would be to apply the salary of Mike Miller (owed $6.6 million in 2014-15) to amnesty, and to trade Udonis Haslem (owed $4.6 million in 2014-15) and Joel Anthony ($3.8 million) to teams with room under the cap.
"They'll have hard decisions to make,'' the GM said. "Of course, they might have won three championships by then.''
It may turn out there will be no decision for Arison to make. James, Wade and Bosh can exercise options to become free agents in the summer of 2014, and one or more of them may surrender to the realities of the repeater tax by acknowledging that Miami simply can't afford to remain in contention year after year after year. Guess who will have gobs of cap space that summer? The only player currently under contract to the Lakers for 2014-15 is Steve Nash. The Lakers could scoop up LeBron, should he choose to opt out, while managing their cap to avoid the tax in 2014-15, liberating them to pursue a run of titles without having to worry about a repeater tax until 2018-19 -- at which time, when the harshest penalties kick in, they may well decide they can afford to pay the extra taxes.
So have at the potential consequences, all of you conspiracy theorists. If the Lakers don't trade Pau Gasol, it will be because they want to save his cap space for LeBron. Pat Riley, now 67, will retire and move back to Malibu rather than face the premature dissolution of the dynasty he assembled. And, if the Lakers eventually prove a willingness to play by a set of new rules that other teams can't afford, fellow owners will be demanding nothing less than a hard cap by opting out of the current CBA in 2017.
Good luck to you, incoming NBA commissioner Adam Silver. The next several years promise to be more provocative than ever.
