A deal that pays Nic Claxton $15 million annually could actually cost the Nets closer to $100 million in the first year alone.
Welcome to the Nets’ Offseason Chronicles, where we’ll break down each potential decision — and what influences those decisions — the team will have to make ahead of the most pivotal summer in the team’s relocated history.
This edition, we’re doing a deep dive into a collective bargaining agreement clause that complicates the Nets’ offseason plans: The repeater tax.
The NBA announced its salary cap for the upcoming 2022-23 season at $121 million and the luxury tax line at $147 million.
For reference, if the Nets sign Kyrie Irving to the maximum possible contract extension, five years, $245 million, they will have a little under $165 million in guaranteed salaries committed to next season.
Which makes the Nets significant, repeat tax offenders since this will be the third year in a row they will pay a luxury tax.
That makes it significantly harder for this team to build out its roster, especially if billionaire team owner Joe Tsai isn’t willing to pay the premium.
WHAT IS THE LUXURY TAX
The luxury tax, also known as the parity tax, is meant to prevent teams in big markets — think New York, Los Angeles, Chicago, Philadelphia — from leveraging their market revenues to outbid small-town franchises (think Oklahoma City Thunder) when recruiting free agents. In short, it’s a way to keep teams with a whole lot of money in check.
Teams, like the Nets, that end up paying out a total salary that exceeds that predetermined luxury tax level, have to pay out a certain number of dollars to the league based on how much their salary went over that luxury tax level. The tax collected then gets distributed to the teams that stayed below the line.
THE PENALTY INCREASES FOR TEAMS FAR EXCEEDING THE LUXURY TAX
For next season, teams that exceed the $147M tax line by $4.999M or less (registering a payroll between $147-151.99M), would have to pay $1.50 for every dollar spent over the tax line.
For example: The Los Angeles Lakers have $145M in guaranteed contracts for the 2022-23 NBA season. If they keep all their current players and use their mid-level exception to sign a player to a deal that pays $5M the first year, that $5M salary would actually cost $9.5M because the Lakers would have to pay $4.5M in taxes on the $3M of that salary that exceeds $147M.
The penalty increases to $1.75/dollar of salary over for teams that spend $5-10M over the tax line. If a team’s salary is $10-15M over the tax, it’s levied a whopping tax rate of $2.50/dollar of salary over. And teams that go $15-20M over get levied a rate of $3.25/dollar of salary over.
If a team spends more than $20M over the tax line, the tax rate is $3.75/dollar of salary over and increases 50 cents for every additional $5M over the tax.
THE PENALTIES INCREASE MORE FOR REPEAT TAX OFFENDERS
The NBA defines a repeat tax offender as a team that has a payroll exceeding the tax line three years in a four-year span. There are three repeat offenders entering the 2022-23 NBA season — the Golden State Warriors, the Los Angeles Clippers and, yes, the Nets.
Unlike the regular tax rate, the repeat offender tax rate begins at a stunning $2.50/dollar of salary over then increases to $2.75, $3.50 and $4.25 for every additional $5M over the line. After the levied $4.25/dollar of salary over, the NBA charges 50 cents for every additional $5M.
If the Nets do nothing else but re-sign Irving to a max contract extension, they will begin this offseason with a $165M payroll plus a $56.5M tax bill, before adding any new players or re-signing any of their other own free agents.
Player salary breakdown:
DURANT: $44,119,845
IRVING: $42,350,000
SIMMONS: $35,448,672
HARRIS: $18,642,857
CURRY: $8,496,653
MILLS: $6,184,500
CARTER: $3,925,000
THOMAS: $2,138,160
SHARPE: $2,109,480
EDWARDS: $1,563,518
WHAT DOES THAT MEAN?
It becomes ridiculously expensive to re-sign someone like Claxton or Bruce Brown. It also becomes exorbitant to use any of their exceptions to add new players to the roster.
In the case of their own free agents, both Claxton and Brown have played themselves into significant pay raises. Brown has become a legitimate 3-and-D wing and could command a salary that pays $10M annually. Claxton, who he missed 10/11 free throws in the Nets’ final playoff game, is a versatile center who is getting stronger by the day. He could command a salary that pays $15M annually.
Keep the tax penalties in mind. Claxton’s first year of his new contract would also add an additional $78.75M in luxury taxes for the Nets. And he’s just one player.
That’s why it’s hard to see the Nets keeping Claxton or Brown. The luxury tax bill begins to outweigh the actual payroll.
HOW ELSE CAN THE NETS IMPROVE THEIR ROSTER?
The Nets have a few million dollars in trade exceptions: $11.6M they obtained in the Spencer Dinwiddie deal; $6.3M created in the DeAndre Jordan deal; $3.3M from the Sekou Doumbouya deal; and the $6.3M taxpayer’s mid-level exception.
Teams can use trade exceptions to acquire players from other teams without needing to send out any players to match salary. They can also use their mid-level exception to exceed the salary cap to sign free agents.
Using each of those exceptions will quickly add to a luxury tax bill that could rank the highest in the NBA next season.
Just how much the Alibaba magnate Tsai is willing to spend to make this team a champion this season remains to be seen. It could depend how he views Claxton: as a mere $15M salary on payroll, or an $80M luxury tax bill.
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