Hoops Rumors Originals

NBA teams can become hard-capped during a given league year if they use specific cap exceptions or make certain transactions, but the league doesn’t have a hard cap in place for all its teams.

However, in addition to its soft cap, the league does have a luxury tax threshold, which serves to discourage excessive spending. When a team’s total salary is over that line at season’s end, the NBA charges a tax for every surplus dollar the club spends.

The luxury tax line is set each season at 121.5% of the salary cap threshold, rounded to the nearest thousand. In 2024/25, the league’s salary cap is set at $140,588,000, so the luxury tax threshold is $170,814,000. That means any team whose total ’24/25 salary exceeds $170,814,000 on the last day of the regular season is subject to a tax bill.

The NBA’s luxury tax system is set up so that the penalties become more punitive the further teams go beyond the tax line. Teams who are in the first tax bracket will pay a significantly less significant tax rate per dollar than teams operating in the third or fourth bracket (or beyond).

In 2023/24, the amount of each tax bracket was $5MM, which meant a team faced an increased tax rate once its total salary surpassed $5MM over the tax, $10MM over the tax, $15MM over the tax, and so on.

In 2024/25 and in subsequent seasons, the size of those tax brackets will increase at the same rate as the salary cap. For example, since the cap rose by about 3.36% from ’23/24 to ’24/25, the size of each tax bracket increased by 3.36% too, from $5MM to $5,168,000.

Here’s what the luxury penalties will look like in 2024/25:

For each additional $5,168,000 above the tax line beyond $25,840,000 a team operates, its tax rates increase by $0.50 per dollar of team salary. So, the penalty is $3.75 per dollar between $20,672,001 and $25,840,000, $4.25 per dollar between $25,840,001 and $31,008,000, and so on.

Here’s a practical example of how the tax penalties work. The Nuggets currently have a team salary of $182,574,315, which is above this season’s tax line by $11,760,315, putting them in the third tax bracket. Denver’s total salary will likely move up or down before the season is over, but the team’s current projected tax bill is $20,356,788. That’s based on a penalty of $7,752,000 from the first tax bracket, $9,044,000 from the second, and $3,560,788 from the third (a penalty of $2.50 per dollar on $1,424,315).

The rates listed above apply to most taxpayers, including 10 of the 14 teams currently in the tax for 2024/25: the Nuggets, Suns, Timberwolves, Celtics, Knicks, Heat, Sixers, Mavericks, Pelicans, and Cavaliers. However, a team can become subject to a more punitive “repeater” penalty if it paid the tax in at least three of the previous four seasons.

This scenario currently applies to four teams — the Warriors, Clippers, Bucks, and Lakers paid the tax at least three times from 2021 to 2024, which means they’ll be repeat offenders this season.

Here are the penalties that apply to repeat taxpayers in 2024/25:

As is the case with the standard penalties, the tax rate continues to increase by $0.50 per tax bracket, so a repeater taxpayer in the fifth bracket would face a tax rate of $4.75 per dollar; that would increase to $5.25 per dollar in the sixth tax bracket, and so on.

The Clippers are currently carrying $173,279,116 in total salary, surpassing the tax line by $2,465,116. Because they’re charged $2.50 per dollar as a repeater taxpayer, their projected tax bill is $6,162,790 instead of the standard rate of $3,697,674.

The further into tax territory a team goes, the greater the difference between the repeater rate and the standard rate becomes. For instance, the Bucks’ projected tax bill at the moment is $74,837,699. If they weren’t subject to repeater penalties, it would be just $52,554,394.

The 2024/25 season is the last one in which the rates outlined above will apply. Beginning in 2025/26, the NBA is adjusting the tax rates to make them even more punitive for repeater taxpayers and heavy spenders. Conversely, the penalties for standard taxpayers who finish the season in one of the first two tax brackets will be lowered.

Here are the changes coming next season:

These rates will continue to increase by $0.50 per tax bracket beyond the fourth bracket.

The goal of these tweaks is to discourage teams from soaring way beyond the luxury tax line without making the tax line itself a major deterrent.

Since luxury tax penalties are calculated by determining a team’s total cap hits at the end of its season, a team that starts the year above the tax line could get under it before the end of the season by completing trades or buyouts. The Pelicans did just that in 2023/24, moving out of tax territory by salary-dumping Kira Lewis‘ expiring contract in January.

New Orleans is one of just two NBA teams that has never been a taxpayer (Charlotte is the other) and is operating only narrowly above the tax line this season, so it wouldn’t be a surprise to see the team make another mid-season deal to duck the tax.

It’s also worth noting that team salary for tax purposes is calculated slightly differently than it is for cap purposes. Here are a few of the adjustments made at season’s end before a team’s tax bill is calculated:

• Cap holds and exceptions are ignored.
• “Likely” bonuses that weren’t earned are removed from team salary; “unlikely” bonuses that were earned are added to team salary.
  • Note: Bonuses based on playoff-related criteria can be removed or added to team salary after the regular season ends. In that scenario, a team’s tax bill is based on its salary at the end of the team’s season (ie. its playoff run), not the end of the regular season.
• If a player with a trade bonus is acquired after the final regular season game, that trade bonus is added to team salary.
• If a rookie or second-year player signed a minimum-salary free agent contract, the applicable minimum-salary cap charge for a two-year veteran is used in place of that player’s cap charge.
  • Note: This “tax variance” rule only applies to free agents, not drafted players.

So let’s say that five teams finish the season owing a total of $75MM in taxes. Where does that money go? Currently, the NBA splits it 50/50 — half of it is used for “league purposes,” while the other half is distributed to non-taxpaying teams in equal shares. In our hypothetical scenario, the 25 non-taxpaying teams would receive $2MM apiece.

As cap expert Larry Coon explains in his CBA FAQ, “league purposes” essentially covers any purpose the NBA deems appropriate, including giving the money back to teams. In recent years, the NBA has used that money as a funding source for its revenue sharing program.

Coon also notes that the CBA technically allows up to 50% of tax money to be distributed to non-taxpaying teams, but there’s no obligation for that to happen — in other words, the NBA could decide to use 100% of the tax money for “league purposes.”

Note: This is a Hoops Rumors Glossary entry. Our glossary posts will explain specific rules relating to trades, free agency, or other aspects of the NBA’s Collective Bargaining Agreement. Larry Coon’s Salary Cap FAQ was used in the creation of this post.

Earlier versions of this post were published in previous years.

The poison pill provision isn’t technically a term defined in the NBA’s Collective Bargaining Agreement. However, the concept of a “poison pill” has colloquially come to refer to a pair of NBA concepts.

The first of those concepts relates to the Gilbert Arenas Provision, which we’ve explained in a separate glossary entry. When a team uses the Arenas provision to sign a restricted free agent with one or two years of NBA experience to an offer sheet, that team can include a massive third-year raise that’s often referred to as a “poison pill,” since it makes it more difficult for the original team to match the offer.

The second meaning of the “poison poll” is the one that has become more common – and more frequently relevant – in recent years. It relates to players who have recently signed rookie scale extensions.

The “poison pill provision” applies when a team extends a player’s rookie scale contract, then trades him before the extension officially takes effect. It’s a rare situation, but it features its own set of rules, since extensions following rookie contracts often create a large gap between a player’s current and future salaries.

For salary-matching purposes, if a player is traded between the time his rookie contract is extended and the following July 1 (when that extension takes effect), the player’s incoming value for the receiving team is the average of his current-year salary and the annual salary in each year of his extension (including option years, but not including unlikely incentives).

His current team, on the other hand, simply treats his current-year salary as the outgoing figure for matching purposes.

Let’s use Rockets guard Jalen Green as an example. Green was extended by Houston last month, but could theoretically still be a trade candidate this season if the right opportunity arises. He’ll earn $12,483,048 in 2024/25, the final year of his rookie scale contract, then $105,333,333 across the next three years as a result of his extension.

If the Rockets decide they want to trade Green this season, the poison pill provision would complicate their efforts.

From Houston’s perspective, Green’s current-year cap hit ($12,483,048) would represent his outgoing salary for matching purposes. However, any team acquiring Green would have to view his incoming value as $29,454,095 — that’s the annual average of the four years and $117,816,381 he has left when accounting for both his current contract and his new extension.

Even after accounting for the more lenient salary-matching rules for teams operating below the first tax apron, the incoming and outgoing salaries in a trade usually have to be roughly in the same ballpark, as we outline in our traded player exception glossary entry. If one side must view Green as a $29.5MM player while the other side considers him a $12.5MM player, filling out a deal with players and salaries that work for both sides would be a challenge.

[RELATED: 11 Players Affected By Poison Pill Provision In 2024/25]

When a player signs a maximum-salary rookie scale extension whose value will be determined by a percentage of the salary cap, a 4.5% cap increase is presumed for the purposes of calculating his average aggregate salary.

Here’s an example. Since this season’s salary cap is $140,588,000, a 4.5% increase would work out to $146,914,460. Pistons guard Cade Cunningham signed a maximum-salary extension that will begin at 25% of that amount with 8% annual raises, which works out to $213,025,967 over five years. Add that figure to Cunningham’s $13,940,809 salary for 2024/25, divide by six years, and you get $37,827,796, which would be considered his incoming salary in the extremely unlikely event that he’s traded this season.

Cunningham’s rookie scale extension could technically be worth up to 30% of next year’s cap if he meets certain performance criteria (e.g. making an All-NBA team), but that isn’t considered in the calculation for the poison pill provision if the performance criteria has not yet been met.

The poison pill provision is one key reason why a team is unlikely to sign a player to a rookie scale extension unless that team is fairly certain it won’t use him in a blockbuster deal before the upcoming trade deadline.

Of course, there are two sides to that coin. The Warriors, for instance, would have an easier time trading Jonathan Kuminga in the coming months than they would if they had extended him prior to opening night, since his incoming and outgoing cap hits are now both $7,636,307 for the rest of 2024/25. But extending Green in October will make it easier for the Rockets to trade him during the 2025 offseason, whereas Kuminga – a restricted free agent – would be trickier to move at that point due to various sign-and-trade restrictions.

Trades involving a player who recently signed a rookie scale extension are already pretty infrequent. Those players are often young building blocks whose career trajectories are promising enough to have warranted a long-term investment. Those aren’t the kind of players teams often trade. The poison poll provision further disincentivizes a deal involving one of those recently extended players by complicating salary-matching rules, making those trades that much rarer.

Note: This is a Hoops Rumors Glossary entry. Our glossary posts will explain specific rules relating to trades, free agency, or other aspects of the NBA’s Collective Bargaining Agreement. Larry Coon’s Salary Cap FAQ was used in the creation of this post.

Earlier versions of this post were published in previous years.