Lakers Payroll & Tax close to $200m in 2013?

As any basketball fan knows, the NBA and it’s players had a rather difficult time coming to agreements on various issues such as revenue sharing, the structure of the salary cap, and the luxury tax imposed on teams going over the salary cap. As they resolved the issues and got back to the business of playing basketball, new revenue deals started coming in such as the Lakers multi-year, multi-billion dollar broadcast agreement.

In the off-season, the Lakers have made some substantial moves such as bringing on Dwight Howard ($19.26m) and Steve Nash ($8.9m), to go with the payroll requirements they already have with Kobe Bryant ($27.85m) and Pau Gasol ($19m). With all those marquee salaries, the Lakers’ total equals $100.38m for the 2012-13 season, which puts them $15m over the second highest team, the Brooklyn Nets at $85.48m, and nearly $18m more than the 2011-12 NBA Champion Miami Heat with $82.63m.

While the NBA has had a salary cap since 1984 ($3.6m), they consider it a ‘soft cap’ because of the various ways teams can exceed the cap, unlike the NFL or NHL, which have ‘hard caps’ and very few ways to exceed the cap. The cap since the 2008-09 has hovered around $58m (it was $58.7m in 2008-09 and $57.8m in 2009-10) Through the 2012-13 season the league has a $1-for-$1 ‘Luxury Tax’ that it imposes on teams that have payrolls over the established luxury tax level. The cap was set at 57% of basketball-related income (BRI, which includes revenue sources such as ticket sales, broadcast contracts, concessions, parking, etc.) under the 2005 collective bargaining agreement (CBA), but has been modified in the 2011 CBA to be between 49% and 51% of BRI going forward. The luxury tax threshold will be set to 53.31% of the projected BRI ($4.481bn) for 2013-14 season, subtracting projected benefits and dividing that by the number of teams in the league. The estimated figure being used is $73m.

The biggest change in the luxury tax is that it will go from a $1-to-$1 tax to a scale based on how many dollars over the cap a team is and if they are ‘repeat offenders’, which the Lakers will most likely be quite often.

The new CBA is rather complicated and allows for a number of exemptions and provisions, but the bottom line is that if a team wants to have excessive payrolls, they’ll pay for that privilege and the teams that can’t afford to put squads on the court at the same payroll levels will benefit as part of the tax will come back to the lower-income teams. The key with the luxury tax is that starting with the 2013-14 season the tax will be paid based on an incremental scale started at $1.50-to-$1 and increasing every $5m in salary ($1.50, $1.75, $2.50, $3.25, etc.). For repeat offenders (if a team pays the luxury tax four out of five years, they are considered a repeat offender) the scale is even steeper ($2.50, $2.75, $3.50, $4.25, etc.).

With the their current salaries and assuming that they re-sign Howard for 2013-14, the Lakers could be looking at a payroll of $105m. With an estimated luxury tax threshold of $73m, that will put them over by $32m. Using the new calculations, their tax bill could look like this (as well as that of the Miami Heat):

Lakers ($105m – estimated salaries 2013-14)
($78m – $73m) * $1.50 = $7.5m
($83m – $78m) * $1.75 = $8.75m
($88m – $83m) * $2.50 = $12.5m
($93m – $88m) * $3.25 = $16.25m
($98m – $93m) * $3.75 = $18.75m
($103m – $98m) * $4.25 = $21.25m
($105m – $103m) * $4.75 = $9.5m
Total Tax Liability = $94.5m

Miami Heat ($86.7M – estimated salaries 2013-14)
($78m – $73m) * $1.50 = $7.5m
($83m – $78m) * $1.75 = $8.75m
($88m – $83m) * $2.50 = $7.35m
Total Tax Liability = $23.6m

Adding their salary of $105m to their potential tax liability of $94.5m, gives them a potential payroll obligation of $199.5m. This doesn’t take into account any exemptions that they will qualify for, but the bottom line is that their 2011-12 tax liability was $12.6m. The good news for the league’s teams that will not have to pay the luxury tax is that 50% of the collected tax payments are distributed to those teams not paying.

Does all this mean that the Lakers will look to cut higher-paid players to avoid paying excessive luxury taxes? According to a statement made by Lakers’ GM Mitch Kupchak, not necessarily,

“Whenever I’ve talked to [Buss] about a budget, it’s always kind of, ‘Well, Mitch, we have a budget, but tell me who you’re thinking about and I’ll tell you if I want him,’ ” Kupchak said. “So yes, the budget and tax threshold is something we’re going to pay attention to, but he’s always understood the value and allure of a superstar and a team that wins.”

(portions of this article, courtesy LA Times)