Last December, the Milwaukee Bucks were at a crossroads. Coming off back-to-back playoff disappointments, Giannis Antetokounmpo was seven months from becoming a free agent. So the Bucks took the plunge, giving the two-time MVP a then record-setting five-year, $228 million extension. They upgraded at point guard by trading for Jrue Holiday, whom they then locked down long-term in April for another $134 million.
In just one year, an NBA championship has already made the decision worth it. But now the Bucks will have to pay for their choices.
They’re not the only ones. NBA teams will combine to spend more than $500 million on the luxury tax this season, per Spotrac. The Golden State Warriors and Brooklyn Nets together will exceed the previous high for the entire league, which was set last year at $264 million.
The NBA luxury tax is applied if a team’s payroll exceeds a threshold greater than the soft salary cap determined at the beginning of each off-season. From 2002-13, teams paid exactly one dollar to the league for every dollar they went over the limit. Starting with the 2013-14 season, teams have paid an incremental rate, where teams pay a higher rate the farther they go over the threshold. Additionally, the league imposes a repeat offender penalty (an additional dollar-for-dollar tax over the payroll threshold) for those who paid a tax in three of the previous four seasons.
Golden State footed the second-highest luxury tax bill of any team in both 2017-18 and 2018-19 by employing Kevin Durant and Stephen Curry, as well as supporting stars Klay Thompson and Draymond Green. Though the Warriors’ dealt Durant (and his $42 million cap hit) to the Nets, their subsequent trade for Andrew Wiggins still costs $31.6 million against the cap, on top of Curry’s and Thompson’s max contracts.
The Warriors, now repeat offenders, are projected to pay far-and-away the largest luxury tax bill in NBA history, but it could have been even higher. Instead of bringing back Kelly Oubre this season at a price tag that would have cost the franchise more than $80 million when accounting for the tax hit, the Warriors chose to sign veterans Otto Porter Jr., Nemanja Bjelica and Andre Igudoala to minimum contracts to fill out their rotation.
The Clippers, meanwhile, still face the repercussions of their extravagant spending last fall. They gave Paul George a max extension, guaranteed Luke Kennard $41 million for three seasons and brought in veteran Serge Ibaka using the mid-level exception.
George lived up to his “Playoff P” nickname by leading the Clippers to the 2021 Western Conference Finals, but Ibaka was injured for the Clippers’ entire playoff run, and Kennard played only 15 minutes per game. After re-signing Kawhi Leoanrd to a long-term agreement this summer, the team is now over the tax threshold. Even after trading guards Rajon Rondo and Patrick Beverley last weekend to shed some salary, the Clippers still face a $92 million bill.
These teams understand that you need to spend to win. On average, about one-fifth of the 30 NBA teams pay the luxury tax in any given season. It has seemingly been a wise investment for some, as 11 of the last 15 NBA champions paid the luxury tax in the year they won the title. This coming season, seven of the nine teams slated to pay at least $10 million in luxury tax dues are also in the top nine of 2022 NBA championship odds on DraftKings.
Several teams getting hit with the luxury tax could justifiably claim that they signed players to long-term deals expecting the cap, and subsequently the tax threshold, to rise more than it has. The cap went up 21% between the 2012-13 and the 2015-16 seasons and then a whopping 45% between the 2015-16 and 2018-19 seasons. With recent revenues down due to the pandemic, the cap has risen just 10% over the past three years.
Teams are hopeful for a rebound. Even if the league decides to smooth the losses from the pandemic over multiple years to avoid a huge spike in the cap, teams have so much confidence in the long-term growth of the league that they have no fear in spending.
Skyrocketing sports team valuations have also contributed to liberal spending habits. Sportico calculates that the Bucks, for instance, are worth more than triple the price they sold for in 2014. Perhaps no other team in professional sports has grown in value more than the Warriors, who were purchased by a group led by Joseph Lacob for $450 million in 2010 and valued at roughly $5.5 billion earlier this year.
Since the NBA loosened its rules in January to allow institutional investors to own minority stakes in franchises, owners now also have more ways to access working capital. The Warriors became the first team to take advantage when they sold approximately 5% of the franchise to Arctos Sports Partners in May.
And in June, Sportico reported that the NBA sold $193.2 million in senior secured notes, as teams utilized national media rights revenue to get a quick influx of cash.
Even more important, however, is optimism over the upcoming media deal. The NFL recently renewed its rights with network partners in an 11-year contract worth more than $100 billion. CBS, FOX and NBC will all pay nearly double their current annual rates in order to keep carrying NFL games.
The outlook within NBA circles is that the league could triple the value of its current $24 billion deal, which runs through the 2024-25 season. Despite deteriorating linear TV ratings, it remains true that nothing beats live sports; in 2019, 89 of the 100 most-watched broadcasts were sports games. Although most of those were football games, the NBA reaches a more diverse and significantly younger audience.
NBA teams aren’t the only ones throwing money around, though. In fact, between July 27 and August 9, NBA, NFL, NHL and MLB teams negotiated $5.2 billion worth of new player contracts—a record 14-day span, according to Spotrac. While NBA teams made up about 60% of that total, the NHL also set a league record for most money ever spent in a two-week period.
While the Delta variant of COVID-19 threatens to burst this bubble, it’s spending season for now, and everyone's a winner. Half of the money collected by the NBA from the 10 teams paying the luxury tax will be distributed to the other 20 in equal shares. The vast majority of those teams don’t have title hopes for the 2021-22 season, but they’ll get at least a $10 million check as a consolation.
