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The NBA utilizes the luxury tax to discourage team owners from 'stacking' their roster and making it unfair on other sides in the league that play in a smaller market. Since the league exercises a soft cap ruling, it is the biggest deterrent considering they can use exceptions to re-sign their own players or bring in others on cheaper deals.
However, it doesn't always work. Without a soft cap, a lot of great NBA sides would not have been formed. The recent Golden State Warriors dynasty have created huge luxury tax bills for their owners due to their roster of superstars, but they have delivered three championships since the 2014-15 season. Sometimes, in order to build an organization's standing and worth, owners are prepared to pay exorbitant amounts of money.
How does luxury tax work in the NBA and who is paying it?
Simply put, the luxury tax is used to help control team spending and is traditionally applied to high-spending teams in the NBA's 'bigger' markets. It comes into force when salaries for a side exceed the pre-determined tax level which changes every season. According to the Collective Bargaining Agreement, the level is determined by taking 53.51% of Basketball Related Income and dividing that figure by 30 (the number of teams in the league).
For every dollar a team is over the limit, they pay a certain amount of tax back to the league. The rate goes up if they are 'repeat offenders', i.e. they have paid luxury taxes in three of the previous four league campaigns.
In the 2021-22 season, the luxury tax payments the NBA will be receiving are expected to be higher than ever before. Ten teams are currently over the NBA's luxury tax line, which was set at $136.6m. Both Los Angeles franchises are involved, as too are last year's champions the Milwaukee Bucks.
The Golden State Warriors have a similar payroll to the Brooklyn Nets - the two highest - but will be paying over $50m more in tax due to being repeat offenders. Steph Curry just signed a $215m, four-year contract extension while Klay Thompson is earning on average $40m for the next three campaigns.
Teams can get below the luxury tax threshold before the league's trade deadline. The Boston Celtics, Philadelphia 76ers and Portland Trail Blazers are all within $7m of the cut-off.
