How the Luxury Tax is Ruining the NBA

In 2022, the Golden State Warriors dramatically won the National Basketball Association (NBA) championship over the Boston Celtics. Led by 34 points from Finals MVP Stephen Curry, Golden State secured its 4th championship in 8 years. This overwhelming dominance was spearheaded by the star-studded lineup, including 3 all-star players and a recovered Klay Thompson. With this unrivalled roster, galvanized by hall-of-fame level coaching from Steve Kerr, Golden State was easily able to secure the trophy. But, how were they able to afford all of these top players while facing a standard salary cap on spending for all NBA teams? The answer is the luxury tax – a rule introduced into the NBA in 1999 that may have disastrous ramifications on the future of the NBA. 

What is a luxury tax, and why does it matter? Well, let’s start at the basics. Each team in the NBA is met with a salary cap which forms a maximum monetary amount that teams can spend on their players’ annual salaries. For the 2021-2022 NBA season, this value was $112.414 million. This may seem like a lot of money. Which it is – but first consider the steep prices of NBA players’ annual salaries. Solely from annual NBA salaries, Lebron James makes just shy of 43 million dollars, in comparison to Stephen Curry, who collects a little under 46 million. As such, affectionately referenced “big-market teams” should be unable to have a roster of 5 Stephs and Lebrons due to the salary cap. 

Contrary to the NBA salary cap, there is no salary limit in Major League Baseball (MLB). Such leads to big-market teams being easily able to create teams of superstar players year after year who form an unparalleled advantage over smaller-market ones that cannot afford large contracts on big-name players. 

Following this line of thought, the salary cap in the NBA should theoretically mitigate the inevitable inequality between big and small-market teams. Teams such as the Los Angeles Lakers will have the same amount of money to spend on players as the Charlotte Hornets. While this might be true, such plans were faulted in 1999, when the great David Stern introduced the luxury tax.

The luxury tax allows NBA teams to exceed the salary cap for an extra fee. Rather than prohibiting excessive spending, the NBA uses this luxury tax system to set a separate threshold above the salary cap and apply a graduated payment system for every dollar above it. [would help if you then explained previous sentence in layman terms] The threshold in the 2021-2022 season was $136,606,000, or around 20% above the typical salary cap. In the next NBA season, this threshold will increase another 15 million dollars, raising it to a total of over $150 million. However, every team is required to pay an additional couple of dollars to the NBA for each dollar spent over the salary cap in a graduated system to encourage teams not to exploit the luxury tax system. 

In summary, big-market teams can then get better players, pay higher salaries, and have a competitive advantage over small-market teams because the NBA wants more profit. This system promotes inequality between teams in the league and pushes away small market teams. Small market teams are now less likely to be competitive in the NBA; they will attain less viewership and attendance from their intrinsically smaller fan bases. This can even cause many smaller market teams to simply relocate or dissolve completely because they can’t compete. 

Turning back to the Golden State Warriors, the team’s current total cap hit comes out to $174,189,694 – the highest of any team in the league. This spending amount was $31,187,694 above the luxury tax threshold, which amounted to about $160 million in luxury tax payments. Not only did the Warriors use the entire luxury tax cap, but they exceeded the amount by over 20%. In stark contrast, the Charlotte Hornets spent just under $111 million in their entire salary payment, below the general NBA salary cap. This wealth disparity between different NBA markets has drastically affected the ability of teams to compete and attain top-level players.

This caustic use of the luxury tax rule extends beyond the Golden State Warriors.

The Los Angeles Lakers, Brooklyn Nets, and Philadelphia 76ers were also millions of dollars over the luxury tax threshold. All these teams have been able to get superstar players and maintain big-name lineups beyond the capacity of small-market teams. 

These frequent salary cap violations may have dire consequences on the future of the league. As time goes on, the salary cap and the luxury tax threshold will grow, along with the willingness for big-market teams to break these boundaries. This will lead to an increasing disparity between big and small market teams, which could destroy the competitiveness of the league. Furthermore, this may leave many beloved small-market teams to leave the NBA rather than face the impossible task of jockeying with overfunded and big-market groups.

Whether the luxury tax will inevitably ruin the future of the NBA or not, we do not know. However, the luxury tax does provide the league with billions of dollars of revenue each year, so we can expect that it won’t end anytime soon. We all want to emulate the time when small-market teams like the Raptors were able to win in 2019 or the Mavs in 2011, but assuming the luxury tax remains, it is unlikely that we will see small-market teams win the league again.