NBA free agency starts this weekend with the marquee attraction being Kevin Durant, torn Achilles and all. While there is much speculation about whether he will stay with Golden State or leave, I look at the question from a different perspective: can the Warriors afford to keep him?
Understanding the Salary Cap
Yes, we’re going to talk about the NBA salary cap! For the uninitiated, the cap limits how much a team can spend on players. This year the cap is $109M. However, the NBA has what’s called a “soft cap”, meaning there are lots of ways to cheat and go over it. The main exception is re-signing your own players for more than their previous contract.
However, there are penalties to keep teams from abusing this too much. The first penalty is called the luxury tax which is a financial penalty the team pays if they have more than $132M in salary. This is only a soft limit though. If owners have deep enough pockets, they can choose to pay the luxury tax in order to have a more expensive (and likely better) team.
Beyond that, there is something called the Apron. This is a hard tax and severely limits your ability to add players once your team salary exceeds $138M. We will not discuss the Apron today, but it is the reason the Warriors will not be able to add a player to replace Durant while he is injured if they do keep him.
Back to the luxury tax…the most competitive teams are generally willing to pay the luxury tax to some degree. However, there are limits and it is an extremely progressive tax. California has nothing on the NBA! The rates go up without bound the further you are above the luxury line (more on this below). If you choose to be a luxury team for multiple years, you also pay a “repeater” tax which bumps your rate up further. The Warriors will be paying the repeater tax for the first time this upcoming season.
As a repeater, the tax rate begins at $2.50 on the dollar. Not 2.5 cents…$2.50. So if you go $5M over the luxury line, you pay $12.5M in tax. That means a $5M contract costs the owner $17.5M in total!
But there’s more…remember the tax rate is progressive.
|Amount Over Luxury Line||Tax Rate|
It keeps going and going…another 0.5X for every incremental $5M.
The Real Cost of Keeping Durant…
So what will it cost to keep KD? Let’s start with a few assumptions. Let’s assume ex-Durant, the Warriors will be right at the luxury line going forward (this assumes they keep Klay and eventually max Draymond). Let’s also assume KD gets the full five year, $224M contract he is allowed. This money would all be taxable at the repeater rate.
I won’t do all the math for you but I will show year 1 here. A max contract starts at $38.1M. Using the table above, the first $5M is taxed at 2.5X, so a $12.5M tax. The next $5M comes at 2.75X, so an incremental $13.75M. We are now at $26.25M total. The next $5M adds $17.5M and so on. The equation is:
5*2.5 + 5*2.75 + 5*3.5 + 5*4.25 + 5*4.75 + 5*5.25 + 5*5.75 + 3.1*6.25 = $163.1M
Yes, the tax on just the first year of KD’s contract is $163M! Add that to the $38M they will actually pay him and the total cost is $200M! In the FIRST YEAR! The year he will not play a game!!!
And it only gets worse from there. The total five year contract brings over $1B of tax payments! That means the Warriors pay $1.25B in total over the contract.
|Year||Durant cash||Luxury Tax||Total Paid by GSW|
Remember, this is for a player who will miss a year, likely struggle the second year, and even after that may never be the same player again. Achilles’ injuries have a very poor record of full recovery for NBA players.
…Is Too Much
We can debate whether three potential elite seasons of Durant is worth the $224M base contract. I don’t think there is any question it is unreasonable to expect the Warriors to pay $1.26B. Remember, the Warriors still have to pay the rest of their players! This is another $132M/yr and growing with inflation. That adds about $750M so $2B in total over the five years.
In comparison, a typical NBA team will have $109M of salary, so call it $600M over five years with inflation growth.
There is no way the Warriors will make $1.4B in extra revenue with KD to breakeven on the contract. It is one thing for fans to have expectations for owners to suck up some luxury tax payments to try to win a title, but there is a limit and the Durant contract is well over the limit. In fact, that is the point of the luxury tax! It makes it overly punitive to keep a team of historically dominant players together. Eventually, you have to make tough choices. The obvious choice is to let Durant walk.