A Basketball Economics Lesson

A BASKETBALL ECONOMICS LESSON IN BRIEF
No team should ever go over the luxury tax threshold unless the owner has the "financial stamina and courage" to avoid suddenly offloading salary to completely eliminate the tax in about one year flat. If there is any chance of the owner cutting and running from the luxury tax in the future, than that owner and that team needs to remain below the luxury tax threshold at all times. At the very least, that owner and that team needs to refrain from going over the luxury tax threshold by more than 5% of the threshold, about $3.5 Million dollars recently.

The Nuggets were almost $13 Million over the luxury tax threshold in 2007-08, a hefty level that only an owner who knew for sure in advance he could continue to pay the tax for at least 2-4 more years (with the tax going down each year) had any business being at.

Because if you get into a situation where the team's salary is so high that it is more than about $6 million or more over the luxury tax threshold, and the owner, for whatever reason, can't stand paying the luxury tax all of a sudden, and decides to stop paying it at all costs, then the necessary cut in the team payroll is huge, and so the cost in basketball terms can end up being the destruction or near destruction of the basketball team, when having a good team was the reason for paying the tax in the first place.

If you do in fact make a huge cut at once, you lose most or all of the side benefits of having paid the tax in the first place, such as the ability to attract quality players to your team at discounted salaries. Because when the team is carved up, quality players aren't going to be very interested in it anymore. Not to mention that your offensive and defensive schemes are now history, and you have to start almost from scratch with them.

As you can see below, in recent years, both the salary cap and the luxury tax threshold have been going up at roughly $3 million each year. This means that if you wanted to back out from paying the luxury tax, and you simply kept the same team total payroll from one year to the next, the luxury tax would go down by roughly $3 million each year. Very little damage would occur if you did it this way.

Alternatively, if you reduced the payroll slightly in a year, by say $3 million, than your luxury tax would go down by $6 million that year. So if you reduced the team payroll by about $3 million over two straight years, and the luxury tax threshold went up by $3 million each year over those two years, than you could in two years go from being almost $13 million over the luxury tax threshold, to being less then $1 million over the luxury tax threshold. This would cause some damage, but not devastation, to the basketball team. If you had a good front office, the damage could be relatively small.

Reducing total team payroll by about $3 million per year is the fastest you can reduce it without doing serious damage to the team. Ideally, you should never reduce team payroll from one year to the next at all, assuming that the NBA salary cap and the NBA luxury tax threshold have not themselves gone down, which, outside of a depression, is almost certainly not going to happen.

Why is $3 million the maximum possible reduction to avoid serious damage? Because that is about 5% of the total payroll, and represents a smart rule to follow if you feel you have gone hog wild, and you now want to stop paying the luxury tax. You can keep the damage to a relatively low level if when you cut the team payroll, you never cut it by more than about 5% per year. Any cut in excess of 5% means that you are doing serious damage to the team. Any cut in excess of 10% means that you are in all likelihood devastating the team.

This is what the Nuggets are apparently doing right now. They are cutting such a high percentage of the team payroll all at once, that they are completely self-destructing their team.

A 5% cut in payroll is actually a roughly 10% payroll cut, relative to the salary cap and the luxury tax threshold, which have been going up by about 5% in recent years. That is the maximum cut you can risk without for sure doing serious damage to the basketball team. Were you to cut the team payroll by 10%, it would really be a roughly 15% payroll cut, relative to the salary cap and the luxury tax threshold. There is virtually no way that the team will not be severely damaged with a 10% actual and 15% real, relative cut in payroll.

Keep in mind that a very well managed team would seldom have to reduce their total payroll at all, either because they were able to go about their business without ever paying any luxury tax, or because if they were paying a luxury tax they never panicked and decided to stop paying the tax all at once, and/or because they at the very least were smart enough to reduce team payroll at a careful rate, without throwing the baby out with the bathwater.

The offloading of Marcus Camby's salary is a textbook example of what not to do, and is smoking gun evidence that the Nuggets franchise is not being managed correctly. Mr. Kroenke can gradually reduce his luxury tax and avoid being considered a failed owner, but he can't make a sudden, massive, huge cut in the team payroll and avoid that tag.

NBA SALARY CAP BY YEAR
2008-09 $58.68 Million
2007-08 $55.63 Million
2006-07 $53.135 Million
2005-06 $49.5 Million
2004-05 $43.9 Million
2003-04 $43.8 Million
2002-03 $40.3 Million
2001-02 $42.5 Million
2000-01 $35.5 Million
1999-2000 $34 Million
1998-99 $30 Million
1997-98 $26.9 Million
1996-97 $24.4 Million
1995-96 $23 Million
1994-95 $15.9 Million
1993-94 $15.1 Million
1992-93 $14 Million
1991-92 $12.5 Million
1990-91 $11.9 Million
1989-90 $9.8 Million
1988-89 $7.2 Million
1987-88 $6.2 Million
1986-87 $4.9 Million
1985-86 $4.2 Million
1984-85 $3.6 Million

Teams being over the cap is the norm, because it is a soft cap, and there are numerous "exceptions" that can be used for a team to legally go over the cap.

On the other hand, if a team goes way over the cap, than the luxury tax kicks in. The luxury tax rule has only been in effect as from 2002-03. The tax owed is the amount by which a team's total salary exceeds the luxury tax threshold.

HISTORY OF THE NBA LUXURY TAX THRESHOLD
NBA LUXURY TAX THRESHOLD BY YEAR
2008-09 $71.15 Million
2007-08 $67.865 Million
2006-07 $65.42 Million
2005-06 $61.7 Million
2004-05 0
2003-04 $54.6 Million
2002-03 $52.9 Million


NUGGETS SALARIES 2002-08

NUGGETS 2007-08 SALARIES
1 Allen Iverson $19,012,500
2 Kenyon Martin $13,250,000
3 Carmelo Anthony $13,041,250
4 Marcus Camby $11,250,000
5 Nene Hilario $8,840,000
6 Eduardo Najera $4,952,380
7 Steven Hunter $3,248,000
8 Chucky Atkins $3,000,000
9 J.R. Smith $2,134,067
10 Anthony Carter $1,103,225
11 Linas Kleiza $1,011,360
12 Von Wafer $770,610
13 Bobby Jones $687,456
14 Yakhouba Diawara $687,456
15 Taurean Green $427,163
16 Mike Wilks $162,281
17 Jelani McCoy $151,089
TOTAL 83,728,827

NUGGETS 2006-07 SALARIES
1 Allen Iverson $17,184,375
2 Kenyon Martin $12,068,182
3 Marcus Camby $8,800,000
4 Nene Hilario $8,000,000
5 Carmelo Anthony $4,694,041
6 Eduardo Najera $4,571,428
7 Reggie Evans $4,000,000
8 J.R. Smith $1,387,560
9 Steve Blake $1,330,000
10 Linas Kleiza $945,360
11 DerMarr Johnson $865,063
12 Jamal Sampson $771,331
13 Ivan McFarlin $412,718
14 Yakhouba Diawara $412,718
15 Jefferson Sobral $75,000
TOTAL $65,517,726


NUGGETS SALARIES 2005-06
1 Kenyon Martin $10,636,364
2 Marcus Camby $9,150,000
3 Andre Miller $8,100,000
4 Earl Watson $5,000,000
5 Eduardo Najera $4,190,476
6 Carmelo Anthony $3,713,640
7 Voshon Lenard $3,520,000
8 Nene Hilario $3,039,889
9 Earl Boykins $2,750,000
10 Greg Buckner $1,670,000
11 Julius Hodge $1,148,760
12 Bryon Russell $1,138,500
13 Linas Kleiza $879,360
14 DerMarr Johnson $835,810
15 Francisco Elson $719,373
TOTAL $56,492,172


NUGGETS SALARIES 2004-05
1 Kenyon Martin $9,454,546
2 Marcus Camby $8,500,000
3 Andre Miller $7,366,667
4 Eduardo Najera $3,809,524
5 Carmelo Anthony $3,471,360
6 Voshon Lenard $3,250,000
7 Nikoloz Tskitishvili $2,910,600
8 Earl Boykins $2,500,000
9 Nene Hilario $2,260,280
10 Rodney White $1,797,845
11 Wesley Person $1,600,000
12 Bryon Russell $1,100,000
13 Greg Buckner $870,046
14 Mark Pope $870,046
15 DerMarr Johnson $745,046
16 Francisco Elson $620,046
17 Luis Flores $385,277
18 Arthur Johnson $385,277
TOTAL $51,896,560


NUGGETS SALARIES 2003-04
1 Marcus Camby $7,250,000
2 Andre Miller $6,400,000
3 Carmelo Anthony $3,229,200
4 Jon Barry $3,000,000
5 Voshon Lenard $2,750,000
6 Nikoloz Tskitishvili $2,721,000
7 Earl Boykins $2,500,000
8 Nene Hilario $2,256,000
9 Rodney White $1,947,600
10 Michael Doleac $1,500,000
11 Ryan Bowen $1,250,000
12 Mark Pope $689,000
13 Jeff Trepagnier $639,000
14 Chris Andersen $639,000
15 Chris Marcus $367,000
16 Francisco Elson $366,931
TOTAL $37,504,731


NUGGETS SALARIES 2002-03
1 Juwan Howard $20,152,000
2 Marcus Camby $6,750,000
3 Nikoloz Tskitishvili $2,530,000
4 Nene Hilario $2,099,000
5 Shammond Williams $1,970,000
6 Rodney White $1,820,520
7 James Posey $1,723,606
8 Ryan Bowen $1,111,111
9 Mark Bryant $1,030,000
10 John Crotty *$1,030,000
11 Chris Whitney $1,000,000
12 Donnell Harvey $992,040
13 Mark Blount $763,435
14 Jeff Trepagnier *$512,435
15 Kenny Satterfield *$512,435
16 Chris Andersen $512,435
17 Predrag Savovic $349,458
18 Junior Harrington $349,458
19 Adam Harrington *$349,458
20 Devin Brown *$349,458
21 Vincent Yarbrough $349,458
TOTAL $43,502,521

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