Hoops Rumors Originals

Although some NBA teams can become hard-capped during a given league year if they use specific exceptions or make certain transactions, the league doesn’t have a set hard cap for all teams. In addition to its soft cap though, the league does have a luxury tax threshold, which serves to discourage excessive spending. When a team’s total salary ends up over that line at season’s end, the NBA charges a tax for every extra dollar the club spends.

The formula to determine the luxury tax line is a complicated one, related to the NBA’s projected basketball related income (BRI) and projected benefits. Generally though, it comes in around 20-22% above the salary cap line. For instance, in 2021/22, the league’s salary cap is set at $112,414,000, while the luxury tax threshold is at $136,606,000. So any team whose total ’21/22 salary exceeds $136,606,000 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 if teams go further beyond the tax line. Here’s what those penalties look like:

• $0-5MM above tax line: $1.50 per dollar (up to $7.5MM).
• $5-10MM above tax line: $1.75 per dollar (up to $8.75MM).
• $10-15MM above tax line: $2.50 per dollar (up to $12.5MM).
• $15-20MM above tax line: $3.25 per dollar (up to $16.25MM).
• For every additional $5MM above tax line beyond $20MM, rates increase by $0.50 per dollar.
  • Note: This would mean $3.75 per dollar for amounts between $20-25MM, $4.25 for $25-30MM, etc.

For example, if a team is over the tax by $12MM, its tax bill would be $21.25MM: $7.5MM for the first $5MM over the tax, $8.75MM for the $5-10MM bracket, then $5MM for the final increment in the $10-15MM bracket.

While these are the rates that apply to most taxpayers – including the Clippers, Nets, Bucks, Lakers, Jazz, and Sixers this season – a team can become subject to a more punitive “repeater” penalty if it paid the tax in three of the previous four seasons.

This scenario currently applies to Golden State — the Warriors were a taxpaying club in 2018, 2019, and 2021, which means they’ll be a repeat offender this season. The Thunder, who were taxpayers in 2018, 2019, and 2020, would also be subject to the repeater tax this season, but they’re far, far below the tax line.

Here are the penalties that apply to repeat taxpayers:

• $0-5MM above tax line: $2.50 per dollar (up to $12.5MM).
• $5-10MM above tax line: $2.75 per dollar (up to $13.75MM).
• $10-15MM above tax line: $3.50 per dollar (up to $17.5MM).
• $15-20MM above tax line: $4.25 per dollar (up to $21.25MM).
• For every additional $5MM above tax line beyond $20MM, rates increase by $0.50 per dollar
  • Note: This would mean $4.75 per dollar for amounts between $20-25MM, $5.25 for $25-30MM, etc.

If the hypothetical team we described in our first example, over the tax by $12MM, was a repeat taxpayer, its bill would increase to $33.25MM.

Generally speaking, luxury tax penalties are calculated by determining a team’s total cap hits at the end of the regular season. So 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 Celtics did just that this season, slipping below the luxury tax threshold at the trade deadline by completing a series of deals that reduced their overall team salary.

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.
• 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 player with 0-1 years of NBA experience signed a minimum-salary free agent contract, the minimum-salary cap charge for a two-year veteran is used in place of that player’s cap charge.
  • Note: This only applies to free agents, not drafted players. For example, Clippers rookie Brandon Boston Jr. (second-round pick) and Lakers rookie Austin Reaves (UDFA) are each earning $925,258 in 2021/22. Boston will count for $925,258 for tax purposes, while Reaves will count for $1,669,178.

So let’s say that five teams finish the season owing a total of $50MM 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 that scenario, the 25 non-taxpaying teams would receive $1MM 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 2012, 2018, and 2020.

The NBA’s rookie scale, which determines how much first-round picks earn during their first four NBA seasons, also dictates how much the qualifying offers will be worth for those players once they’re eligible for restricted free agency after year four. However, the value of those qualifying offers can fluctuate depending on whether or not a player has met the “starter criteria.”

Here’s how the starter criteria works:

A player who is eligible for restricted free agency is considered to have met the starter criteria if he plays at least 2,000 minutes or starts 41 games in the season before he reaches free agency.

A player can also meet the criteria if he averages either of those marks in the two seasons prior to his restricted free agency. Due to the fact that only 72 games were played in the 2020/21 season, these requirements have been slightly adjusted, but will return to normal next season.

A player’s ability or inability to meet the starter criteria impacts the value of the qualifying offer he receives as a restricted free agent, as follows:

• A top-14 pick who does not meet the starter criteria will receive a qualifying offer equal to the amount the 15th overall pick would receive if he signed for 120% of the rookie scale.
  • Note: For the summer of 2022, the value of this QO will be $7,228,448.
  • Example: Cavaliers guard Collin Sexton (2018’s No. 8 overall pick) won’t meet the starter criteria this season. As a result, he’ll be eligible for a QO worth $7,228,448 instead of $8,559,357.
    
• A player picked between 10th and 30th who meets the criteria will receive a qualifying offer equal to the amount the ninth overall pick would receive if he signed for 120% of the rookie scale.
  • Note: For the summer of 2022, the value of this QO will be $7,921,300.
  • Example: Hornets forward Miles Bridges (2018’s No. 12 overall pick) has met the starter criteria this season. As a result, he’ll be eligible for a QO worth $7,921,300 instead of $7,459,974.
• A second-round pick or undrafted player who meets the criteria will receive a qualifying offer equal to the amount the 21st overall pick would receive if he signed for 100% of the rookie scale.
  • Note: For the summer of 2022, the value of this QO will be $4,869,012.
    
  • Example: Thunder wing Luguentz Dort (an undrafted free agent) has met the starter criteria this season. As a result, he’ll be eligible for a QO worth $4,869,012 instead of $2,228,276 if Oklahoma City declines his team option to make him a restricted free agent.
    
• For all other RFAs, the standard criteria determine the amounts of their qualifying offers.

Extending a qualifying offer to a player who is eligible for restricted free agency officially makes that player an RFA, ensuring that his team has the right of first refusal if he signs an offer sheet with another club. It also gives the player the option of signing that one-year QO.

Generally, the value of a restricted free agent’s qualifying offer isn’t hugely important, since very few RFAs accept those offers outright. There are exceptions though.

In 2020, for instance, Kris Dunn met the starter criteria, which ensured that his qualifying offer would have been worth $7,091,457 instead of $4,642,800. The Bulls opted not to extend that $7MM+ QO, making him an unrestricted free agent, and he ended up signing a two-year, $10MM contract with Atlanta. If Dunn hadn’t met the starter criteria, it’s possible Chicago would’ve been more comfortable issuing a $4.6MM qualifying offer, which would’ve significantly changed the way Dunn’s free agency played out.

We’ll revisit the starter criteria at season’s end to see which of 2022’s potential restricted free agents will have their qualifying offers impacted by meeting – or failing to meet – the starter criteria.

So far, of this year’s RFAs-to-be, Bridges, Dort (team option), Deandre Ayton, Mohamed Bamba, and Jae’Sean Tate (team option) have met the starter criteria. There are a few players who could still get there, led by Anfernee Simons, who has made 26 starts and logged 1,555 minutes.

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.

Information from Larry Coon’s Salary Cap FAQ and RealGM was used in the creation of this post. Earlier versions of this post were published in 2019 and 2020.