The NBA’s big spenders will soon have to reckon with a much more punitive luxury tax structure. From the league’s implementation of the tax in 2003, teams have been required to pay “just” one dollar in luxury tax for every dollar in payroll that exceeds the tax threshold. This relatively soft penalty on an already soft salary cap will soon undergo significant changes. Cap guru Larry Coon describes the new luxury tax conditions under the 2011 Collective Bargaining Agreement, which will kick into effect next year:
Starting in 2012-13, teams pay an incremental tax that increases with every $5 million above the tax threshold ($1.50, $1.75, $2.50, $3.25, etc.). Teams that are repeat offenders (paying tax at least four out of the past five seasons) have a tax that is higher still — $1 more at each increment ($2.50, $2.75, $3.50, $4.25, etc.).
The desired effect is that these heavier penalties will give pause to even the deepest pocketed, biggest spending owners such as the Knicks’ James Dolan, the Lakers’ Jerry Buss, and the Mavericks’ Mark Cuban, when it comes to dishing out big bucks on salaries. (Though many might point to this summer’s free agency period as evidence the dissuasive effect has been minimal so far).
With the Kroenke family at the helm, the Denver Nuggets have been in the upper strata of teams with wealthy owners. According to a 2011 report by Yahoo’s Joe Dorish, Stan Kroenke was the fifth richest NBA owner, worth about $3.2 billion. While this may be technically inaccurate given the fact that he transferred ownership of the Nuggets to son Josh Kroenke in 2010, it seems fairly obvious that the money is all in the family, which happens to include Stan’s wife Ann Walton Kroenke, daughter of Wal-Mart magnate Bud Walton, who is more than a little well off in her won right. Which is all to say that the Nuggets have some big bucks behind them.
Even so, having money and spending money are not the same thing, and considering how much could potentially have been spent (the Knicks have paid a whopping $195 million in luxury tax, highest in the league), the Nuggets have shown some restraint since the tax went into effect. ShamSports‘ Mark Deeks (follow him at @MarkDeeksNBA) recently published some fantastic detailed information about how much every NBA team has spent in luxury tax since the system kicked in following the 2002-03 season. (Follow the link to see which teams have paid the most, and which haven’t paid any at all).
It turns out that among all the teams in the league, Denver has spent the 11th most in luxury tax in the nine seasons since its implementation. The total amount the Nuggets have been taxed is $21,157,439, but the distribution of their payments has been quite uneven.
In the 2006-07 season, the Nuggets paid $2,022,418 in luxury tax, in 2007-08 they paid $13,572,079, and in 2009-10 they paid $5,562,942. In the other six seasons when the tax was in effect, they successfully kept the payroll low enough to avoid paying it.
Although the recent history of Nuggets player movement surely won’t be anything new to the fans who track it carefully, it can’t hurt to take a little stroll down memory lane to review in particular how Denver ended up paying over $13.5 million in luxury tax in 2008.
At that time, a perfect storm of massive contracts converged. 2004 saw what probably should be considered one of the most ridiculous moves in Nuggets franchise history. Then General Manager Kiki Vandeweghe shipped out three first round draft picks to the New Jersey Nets for Kenyon Martin in a sign and trade deal worth over $90 million over seven years. With annual pay raises of over $1 million each season, Martin was making upwards of $13, $14, $15 and $16 million respectively in each of his last four seasons with the Nuggets. His contract would prove to be an immovable albatross around Denver’s neck, which strangled their flexibility for the entire duration of the Carmelo Anthony era.
2004 was also the year Marcus Camby re-signed with the Nuggets on a six year, $65 million deal. Two years later, Denver made two more major signings. First, they re-signed Nene to a six year, $60 million deal. Shortly thereafter they extended Melo, who had been on his rookie contract up to that point, delivering him a maximum five year, $80 million deal which went into effect in the 2007-08 season.
So going into the 2007-08 season, Denver had about $44 million in guaranteed salary owed to four players – Martin, Anthony, Nene and Camby. The previous season they had paid about $2 million in luxury tax, with Andre Miller earning about $10 million, and role players filling out the roster to push the total payroll slightly over the threshold.
But then in December 2006, the triumvirate front office of Mark Warkentein, Rex Chapman and Bret Bearup saw the opportunity to add another star player alongside Melo, and traded Andre Miller to the Philadelphia 76ers for Allen Iverson, who was slated to make about $19 million in 2007-08 and $21 million in 2008-09. The result of this was that in the 2007-08 season, the Nuggets had committed over $65 million in guaranteed salary to their five top players. The salary cap was $55.6 million and the luxury tax was just under $68 million at the time, and given that a near-luxury limit payroll was committed to so few players, simply filling out the roster to its minimum number inevitably thrust the Nuggets deep into the luxury tax.
After Denver got swept in the first round of the 2008 playoffs by the Lakers, however, it appeared that Stan Kroenke became determined not to spend so exorbitantly on a roster that wasn’t delivering on the promise of postseason success. In a move that was fairly controversial at the time, the front office promptly dumped the contract of Marcus Camby off to the Clippers for a second round draft pick (or as most were calling it, “nothing”).
Just under four months later, shortly after the start of the 2008-09 season, they sent Iverson to the Pistons for Chauncey Billups (and Antonio McDyess, who was immediately waived). The end result of these, and a few other smaller maneuvers, was not only to successfully get under the luxury tax threshold in 2009, but at the same time achieve a playoff achievement which had been unprecedented in Melo’s tenure, getting out of the first round for his first time, then reaching the Western Conference Finals and giving the Lakers a run for their money before finally losing the series in six games.
This seemed to serve as proof of concept that by making smarter, more spendthrift moves, Denver could continue improving its roster without breaking the bank. After getting under the luxury limit in 2009, they did slip back over it again in 2010 due mostly to the pay raises on all those big contracts. But essentially the commitment to fiscal discipline has seemed to be a guiding principle which has continued as ownership has transferred from father to son and as Masai Ujiri has taken charge at the front office.
As the Nuggets move forward, the number of medium-sized contracts guaranteed to players who as yet are not bona fide stars will most likely force the front office to make some tough decisions. But having already shown their will to stay out of luxury tax territory over the past few seasons, we can almost certainly expect a continued effort to do so after the tax becomes much more punitive in 2013.