Appreciate Heat now, as upcoming tax threatens a potential dynasty
In '14-15, a new tax will kick in, bringing biggest penalties the NBA has ever seen
Unless financial circumstances of NBA improve, Heat may have to break up Big 3
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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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