CBA Talk: Can You Sustain a High Level of Competitiveness Without Paying the Luxury Tax?

In the Simon piece, I included the rather dramatic visual above that shows how much NBA teams spent last season in relation to how well they performed. As you can see, the more teams spent, the better they seemed to do.

This is one of those “Wow!-Golly-Gee-Whiz!” pictures that always makes me nervous. There’s always the danger of a “misleading vividness” fallacy. Essentially, it is accurate, for what it shows, but may or may not be “true” in the broader discussion. Normally, I prefer looking at data over a longer period of time to see if a trend holds true. In this case, I only had the one year, and the point is fair, if incomplete.

To flesh this out a little, I went back and grabbed payroll information for the three seasons prior (2006-07, 2007-08 and 2008-09. I used Basketball-Reference.com for this. That site’s info is slightly less trustworthy than Shamsports, but I don’t think it tells us any lies. Any variations/inaccuracies are immaterial to the big picture.)

(All Chart Figures in Thousands US $)

It would have been nice for my point (but bad for the Pacers’ hopes of contending under the tax threshold) if the three previous years had shown the same startling steps up and to the left as the 2009-10 season showed. They did not, but they do show a troubling trend.

The scales on these are all the same, going from $50 million to $90 million. The first thing to notice is that the graph is taking up more vertical space, meaning more dollars are being spent.

The second thing to notice is that bars are “sliding to left.” Arguably the 2009-10 chart is the continuation of a cycle. In 2006-07, Pacers owner Herb Simon’s restriction on exceeding the luxury tax threshold seemingly did not preclude contending at a high level. Only two of the final eight NBA teams left standing near the end of the season — and just one of the final four playoff teams — paid the luxury tax that year.

The next year, however, there were four taxpayers in the final eight, and three of the final four. And in 2008-09, that jumped to five of eight (although it dropped to only two of the final four). It peaked last season with seven of the final eight teams being taxpayers, including all four of the Conference Final teams.

But that’s not the whole story. There are some other things to note about the prior years.

First, we need to talk about the Knicks a bit.

You will see that I put two bars (the two furthest to the right) in the “Lottery” section for the first three years — one with the Knicks and one without. I did this because New York’s payroll (and behavior) was arguably insane relative to the rest of the league.  This can largely be explained by two words: Isiah Thomas. Over the first three seasons shown here the Knicks’ combined payroll was $310 million. This is $25 million more than second-place Dallas, which is run by the almost equally nutty Mark Cuban. (According to Forbes, Dallas had over $50 million more revenue than the Pacers last season, yet still lost almost $8 million.) Moreover, the Zeke-led Knickerbockers outspent third-place Cleveland by a stunning $74 million. Indiana had the 14th-highest payroll during that three-year period and were outspent by $111 million.

The second factor to pay attention to is spending after success.

The Cleveland Cavaliers made the finals in 2007 with a payroll of $63 million. That was the final year of LeBron James’ rookie deal, and the man who almost-single-handedly carried them within four games of the championship made only $5.8 million for his services that season. The Cavs payroll the next two years? Oh, it was $82 and $91 million, respectively. Last season, it was $85 million.

The Los Angeles Lakers lost in the 2008 Finals with a $72.6 million payroll, then won the 2009 title with $78.2 million payroll.  Though they were still taxpayers in both seasons, their spending was artificially depressed by Andrew Bynum’s rookie contract. He was paid just $2.1 million and $2.8 million in those years, respectively. In 2010, his salary jumped to $12.5 million, then again to $13.7 million this year as the payroll for a champions skyrocketed above $90 million.

Lastly, the Orlando Magic went to the Finals in 2009 as a non-taxpayer (with a payroll of $70 million). Falling short of the ultimate goal, they have increased their title push the last two years, spending progressively more money while becoming progressively less successful. The Magic spent $82 million in 2010 to lose in the Eastern Conference Finals. This year? They spent a just hair under $90 million for a first-round exit.

The trend since 2007 has been for more spending to be necessary to reach higher levels of success.

However, in 2010-2011, the picture indicates a step back in that regard.

Clearly, the playoffs are still going on, so we can only extrapolate based on those teams we already know are in the lottery, those eliminated in the first round, and those still playing. A sizable gap remains between the payrolls of those teams that made the the lottery and those that the playoffs. But the spending of the squads that made playoffs are much flatter. So far, there is little difference between the payrolls of those who were bounced in round one and those who still have a chance at the title.

But again, there are some significant things to consider here.

First, we’re coming off the “Summer of LeBron.” Teams had been targeting the free agent class of this past summer for years. And they rearranged their payrolls accordingly. Maybe they couldn’t get LeBron or Dwyane, but many teams were committed to at least go down swinging if they missed out. As a result there was a significant decline in salaries leaguewide. However, there’s plenty of indication that this is a short-term dip.

Consider Miami, Chicago and Oklahoma City: the three lowest-payroll teams still playing (and three of the four lowest payrolls among all of the playoffs).

Miami was the “big winner” in last season’s LeBron/Dwyane sweepstakes. To do that, they had to completely gut their roster and drop to almost no payroll. They have $43 million of their almost $67 million payroll tied up in James, Wade and Chris Bosh. Within two seasons, the salaries of those three alone will grow to over $52 million — and they have a stunning $68 million already committed to only six players for that 2012-13 season.

Chicago also cleared tons of cap space for last summer and were only marginally less active in the free-agent market. They added Carlos Boozer as their big name, but still fielded the only playoff team with a payroll below the salary cap (yes, cap, not tax threshold) at $55.6 million. They owe this feat to rookie contracts. The 2011 MVP Derrick Rose made only $5.5 million this season while their best big man, Joakim Noah, made $3.1 million. That, too, will change in the next two seasons.  Noah’s extension bumps him up to $12 million next year, and Rose will certainly become a max-contract player the season after. In two years, they would have about $54 million tied up in four players.

Finally, Oklahoma City’s payroll checks in at slightly over $58 million, and you should all know the answer to their “spend-thrift miracle” intuitively: rookie contracts. The Thunder pay Kevin Durant, Russell Westbrook, James Harden, and Serge Ibaka — their four leading scorers so far in the playoffs — less than $16 million combined. However, Durant’s max extension kicks in next year, and he goes from a salary of $6.1 million to $13.6 million. Westbrook and Ibaka will come due for a raise the year after that. It’s little wonder that “how are they gonna pay all those guys?” is a common refrain when looking at the Thunder’s future.

These three teams, as well as the Cleveland, L.A., and Orlando examples above, represent the “pay me now, or pay me later” nature of the current CBA. Under the current CBA or something similar, these teams that are currently both successful and frugal will soon either become taxpayers — or cease being successful. There’s not really a realistic third outcome.

In the five-year period I have studied, only two teams have made it out of the first round more than once without paying the luxury tax at any point in the five years: Chicago (in 2007 and 2011) and Atlanta (in 2009, 2010 and 2011).  We have already discussed Chicago. And Atlanta is staring down the barrel of the tax next year, with $66.7 million already committed to only seven players.

Given the specific roster makeup of most of the more successful non-taxpayers (flush with premium players and/or rookie contracts), it seems to me that Herb Simon’s commitment to spending up to the tax threshold is not sufficient to field a contender under the current rules.

(This article has been updated since its original publication to aid clarity.)