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The Celtics luxury tax problem: understanding the Repeater Tax

The Celtics are officially entering the luxury tax, but should they try to get out of it or accept the price tag for what could be a championship team?

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After a lengthy delay, Marcus Smart is officially coming back to the Celtics on a four-year, $52 million deal that has no player or team options. As the team and fans celebrated the return of the heart and soul of the franchise, one little detail squeaked by the mainstream fanbase: the Celtics are now over the luxury tax by about $2,927,880.

Building a championship team in the NBA is tough these days. While there’s no doubt that superstars drive the league and win its championships, there are beginning to be rumbles around the league of things growing stale. Some saw that quartet of Warriors-Cavaliers Finals as a fun rivalry that will define the mid-2010's in the league. Others grumbled about the Warriors 8-1 record in the Finals after adding Kevin Durant. The league doesn’t want the title to be a foregone conclusion, and (seemingly as a direct result of the past Miami Heat superteam) instituted a luxury tax provision that included a draconian “repeater tax," designed to incur heavy financial penalties against consistently high spending teams and effectively encourage owners to break up superteams.

When the Cleveland Cavaliers won the title in 2016, they had to pay an additional $45 million in taxes on top of their $121 million dollar roster due to the luxury tax. Had they been able to keep Lebron James this year, their team bill could have reached right around $300 million. The Golden State Warriors have paid a little over $113 million in luxury taxes the past two seasons and with the repeater tax coming for them during the 2019-20 season, they could eventually be paying $400 million if they’re able to keep all their pieces.

Winning doesn’t always guarantee profit either. The Cavaliers actually reported a EBITDA loss of $40 million the year they won the title.

Meanwhile, the Warriors made about $92 million that season after writing a check for revenue sharing and paying out the luxury tax.

The longer you’re in the tax, the steeper the penalties. Down in Oklahoma City, the Thunder, who are a repeater tax team (we’ll get to that in a minute), were staring at a $300 million payroll due in large part to Carmelo Anthony’s expiring $28 million contract. By trading him, the Thunder were able to save $73 million. Had he been a more productive player, the Thunder would have had a much more difficult decision to make on whether the small chance of winning a title was worth $300 million. But let’s get back to the Celtics.

Due to the fact that Boston doesn’t have to negotiate new contracts with Kyrie Irving, Terry Rozier, Al Horford, etc. until next season, this was a year where the Celtics could have looked to avoid the luxury tax. Why? Because once you’ve become a luxury tax team in three out of four seasons the team will become subjected to the repeater tax (it’s back again), which are steeper taxes for every dollar a team is over the luxury tax. Here is a breakdown of how the incremental tax rate works from the Larry Coon's CBA FAQ:

What is the Repeater Tax?

The repeater is an increased tax rate on teams that have been taxpayers in three of their previous four seasons. Should the Celtics be taxpayers this year, they project to be in the repeater tax beginning in the 2021-2022 season. The repeater tax greatly accelerates the tax payments that a team must make, taxing a team a full dollar more for each dollar spent over the tax. For example, a team $20M over the tax line would normally pay a tax bill of $45M. With the repeater tax, that tax bill balloons to $65M.

It’s important to understand the mechanics of the luxury and repeater taxes, because there’s a propensity for us as fans, to hear about owners paying the tax and simply shrug and say “well, that’s what it will cost to be a championship team." However, there’s an extremely big difference between paying $15M for owners and paying $80M. In a way, the NBA might encourage a team to “overspend” to put a great team together, but overspending over several years to keep that team together will be penalized. It’s all well and fine to look at the numbers and say that “they’ll pay for a championship team” but at the end of the day, owning an NBA team is a business. No matter how benevolent or driven an owner may be, there will always be a point where costs become too prohibitive and it no longer becomes tenable for a team to pay all that money.

The Celtics are a team on the come-up, a mostly young squad led by three All-Stars that is hovering right around the tax line currently. Ainge previously told reporters that the Celtics plan on “for sure” being tax-payers in 2019. This is some slick politicking from Ainge, who I’m sure is well aware that the Celtics not being taxpayers in 2019 would require the exit of one of Kyrie Irving or Al Horford. Instead, the question is about this year’s team bill and whether or not the Celtics will zig under the tax for one more year, given how close they are to the tax line. This isn’t a testament to the Celtics being afraid to spend a couple extra million right now, but rather how being in the tax this year could compound down the road into a choice that costs the Celtics north of $20M in a year when they will be paying much more than they are now.

The problem with projecting out multiple years, as my wiser peer Keith Smith noted in his own excellent detailing of the Celtics tax situation, is that there are simply too many variables to account for when making these projections. Increases and decreases in the cap, picks conveying, players becoming worse or better, player options, collective bargaining, free agency, and (most importantly) trades all have a tremendous impact on a team. This make projecting more than a year out a fool’s errand. It’s akin to throwing a penny into the air and trying to hit it with a dart.

That said, we’ll do just that in the next installment of the series.