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  • Writer's pictureNandan Malhotra

Underlying Role of Luxury Tax in the NBA - Part 2

Exceptions to the rule


Tax exceptions allow teams to sign players despite being over the salary cap. These exceptions help teams limit excessive spending and avoid paying luxury taxes. By utilizing the appropriate exception for each player, teams can minimize the amount of luxury tax they owe. Since most teams exceed the salary cap to some extent each year, tax exceptions are essential for their financial management. Since a large portion of the salary cap is consumed by marquee players, cap exceptions help teams develop a competitive roster. The types of luxury tax exceptions available to teams are discussed hereinafter.


Minimum salary exception


The NBA minimum salary exception allows a team to sign a player on a minimum salary, regardless of the team’s salary cap situation is. This also applies when trading for a player on minimum salary. There is no limit on the use of the minimum salary, meaning that teams can fill up their roster with minimum salary-players, even if they are over the cap. Every team over the cap will use this exception multiple times each year.[13]


Mid-level exception


Each team can sign one or more player(s) each year, with the mid-level exception. The length of this contract is typically four years with a fixed first year salary must be a fixed amount. The amount increases each year; however, it depends on the team’s salary situation. The mid-level exception can also be used by teams with cap room to re-sign their own free agents for up to two years.[14]


Bi-annual exception

As the name suggests, a bi-annual exception can be used once every two years to sign players to two year contracts. This exception is the middle ground for players who demand more than the minimum but earn less than the mid-level. The usage of the bi-annual exception makes the luxury tax threshold a hard cap, which means teams cannot go beyond it for the rest of the season. The bi-annual exception is calculated every year by comparing the percentage increase or decrease in the salary cap of the preceding year to the current year.[15]


Bird exception

The Bird exception is one of the most significant exceptions, as it allows teams to keep their players, whatever their salary. A team acquires bird rights of a player if a player stays with a single team for a minimum of three seasons without switching teams as a free agent. The team holding the bird rights of a player enjoy certain advantages such as the ability to offer said player such as the ability to offer said player an additional year on the contract for the maximum salary. In practice team holding bird rights of a player can offer a maximum five year contract, whereas the team that does not hold the bird rights can offer only a maximum four year. Any player that qualifies for the bird exception may sign any contract with their current team up to the maximum salary. This exception is crucial for the most dominant teams, as it allows them to keep their core of stars together.[16]


Early-Bird exception

This is the lesser version of the bird exception, and it only requires two years without becoming a free agent. Under this exception, players can be signed for up to 175% of their previous salary or 104.5% the league average salary, whichever is greater. The term of Early-Bird contracts is usually between two and four seasons.[17]


Non-Bird exception

This applies to players that do not qualify for either of the previous two exceptions. A team acquires non bird rights of a player if he spends a single year with the team. Under this exception, teams can go beyond the cap and sign a player for up to four years for 120% of their previous salary.[18]


Disabled player exception

Teams can sign a replacement player on filing an application for a disabled player exception for an injured player that is out for the remainder of the season or the entire season. The team may sign a player for one year up to the lower value of 50% of the injured player’s salary or the amount equal to the non-taxpayer mid-level exception.[19]


Rookie exception

The rookie exception simply allows teams to sign their drafted players to rookie contracts even if they are over the cap.[20]


Trade exception

Teams over the salary cap can trade as long as they do not take on more salary than the other exceptions allow. If a team that is over the cap trades away a player on a higher salary than the player they receive, they can use the trade exception. The team that loses salary can acquire salary in trades up to the salary difference in the original trade.[21]


Luxury Tax: A boon or a bane

Since the inception of the luxury tax in the NBA, the league has discovered another pipeline for generating revenue. The anecdotal evidence shows that box office teams like “Showtime Lakers” “Jordan Bulls” “Warriors Dynasty” were kept together at the cost of a steep luxury tax to be paid to the league. The teams also saw an enormous growth in their income, which included ticket sales, merchandise, and apparel sales. People wanted to see superstars play together, which shot up the NBA ratings. However, the small market teams whose owners don’t have deep pockets are not willing to enter into the luxury tax. As a result, they might not be able to land superstar talent, enabling them to contend for a championship. A competitive imbalance caused by the luxury tax has always been hurtful to the fan base of a small market team.


References

[13] “CBA Breakdown :Understanding the NBA’s Collective Bargaining Agreement” https://cbabreakdown.com/salary-cap-exceptions


[14] Joe Cox, “NBA Salary Cap Exceptions Explained” https://franchisesports.co.uk/nba-salary-cap-exceptions-explained/


[15] 2017 NBA- NBPA Collective Bargaining Agreement, Article VII, Section 6(d) https://cosmic-s3.imgix.net/3c7a0a50-8e11-11e9-875d-3d44e94ae33f-2017-NBA-NBPA-Collective-Bargaining-Agreement.pdf


[16] “CBA Breakdown :Understanding the NBA’s Collective Bargaining Agreement” https://cbabreakdown.com/salary-cap-exceptions


[17] Joe Cox, “NBA Salary Cap Exceptions Explained” https://franchisesports.co.uk/nba-salary-cap-exceptions-explained/


[18] Joe Cox, “NBA Salary Cap Exceptions Explained” https://franchisesports.co.uk/nba-salary-cap-exceptions-explained/


[19] 2017 NBA- NBPA Collective Bargaining Agreement, Article VII, Section 6(c) https://cosmic-s3.imgix.net/3c7a0a50-8e11-11e9-875d-3d44e94ae33f-2017-NBA-NBPA-Collective-Bargaining-Agreement.pdf


[20] 2017 NBA- NBPA Collective Bargaining Agreement, Article VII, Section 6(h) https://cosmic-s3.imgix.net/3c7a0a50-8e11-11e9-875d-3d44e94ae33f-2017-NBA-NBPA-Collective-Bargaining-Agreement.pdf


[21] 2017 NBA- NBPA Collective Bargaining Agreement, Article VII, Section 6(j) https://cosmic-s3.imgix.net/3c7a0a50-8e11-11e9-875d-3d44e94ae33f-2017-NBA-NBPA-Collective-Bargaining-Agreement.pdf

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