Where does the NBA luxury tax money go to? Taking a closer look

“Luxury tax” is a term that many basketball fans are familiar with as it is often brought up when discussing teams’ financial situations. However, many fans still don’t know exactly what the tax is or where the money goes.

The luxury tax is basically an extra fee that teams must pay if they spend too much on their roster payrolls. This measure was implemented to promote fairness within the league by preventing wealthy franchises from excessively splurging on player acquisitions. When a team surpasses the luxury tax threshold and pays the fee, the money is subsequently redistributed to other teams with lower payrolls.

In addition, some of the proceeds go toward funding league initiatives, including player benefits and veteran minimum contracts. All of this helps ensure that players and owners are treated fairly league-wide.

The luxury tax threshold is a separate number from the salary cap threshold. For example, in the 2022-23 NBA season, the salary cap was set at $123.655 million, while the luxury tax was set at $150.267 million. The luxury tax threshold varies annually and is based on how much revenue each team generates.

As for the fee for teams surpassing the luxury tax threshold, it is determined by a graduated payment system. So it depends on how far a team goes beyond the luxury tax and how long they have been doing so. According to Diario AS, the fee was between $1.50 and $4.75 for every dollar above the threshold as of 2022.

If a team pays the luxury tax for three or more consecutive seasons, they become known as a luxury tax repeater. This means that they will receive even stricter penalties, including higher fees, increased trade and free agency restrictions and severer salary-cap limitations. This makes it even more difficult for the highest-spending teams to fill out their rosters.

Most would agree that the luxury tax has been fairly successful in preventing a select few teams from dominating the NBA in recent years. This comes as the league has now had a different champion in each of the last six years.

How high is the luxury tax threshold for the 2023-24 NBA season?

NBA commissioner Adam Silver

As for the 2023-24 NBA season, the salary cap and luxury tax thresholds have already been reported. According to The Athletic’s Shams Charania, there has been a 10% increase for both thresholds. The new salary cap figure is set at $136 million while the new luxury tax figure is set at $165 million.

According to ESPN’s Bobby Marks, the change is expected to have a very positive effect on supermax contracts, rookie extensions and tax-paying teams.