NBA Finalizes Salary Cap and Luxury Tax

The shape of the NBA’s financial landscape for the 2020-21 season is finally coming in to focus. ESPN reported yesterday that the salary cap will be set at $109.1 million and the luxury tax will be $132.6 million — unchanged from the 2019-20 season.

This news contrasts with previous speculation that salary cap would remain unchanged but the luxury tax would increase.

What does this mean for the Blazers?

For the Portland Trail Blazers, a flat luxury tax has two consequences. As a team that will be operating in the liminal space between the cap and tax, the Blazers will be relying on cap exceptions to acquire new players. A smaller space between the cap and tax means their flexibility to use all of the available exceptions and Bird Rights will be slightly more limited.

On the positive side, other teams will be similarly limited and several opponents will likely not be able to use their full mid-level exception (MLE) now. This will give the Blazers an advantage when negotiating with free agents who expect the full MLE. For a more detailed discussion, check out this article from two weeks ago.

Tax rate reduced in proportion to BRI change

As a compromise for not raising the luxury tax level, the league agreed to reduce the tax hit on teams at the end of the season. This one gets a bit tricky so here’s the pertinent section from the ESPN article:

Sources also said that, in an attempt to ease the tax burdens of teams that had been planning on the salary cap and luxury tax continuing to steadily rise, the NBA will reduce the luxury tax bill for teams at the end of the 2021 season by the percentage amount that the league’s Basketball Related Income declines from initial projections.

For example, if it drops from a projected $8.45 billion to $5.9 billion — a 30% decline — the Golden State Warriors’ projected luxury tax bill would be reduced from $60 million to $42 million.

In addition to helping the teams with exorbitant payrolls this will also favor the players. If a few teams are less likely to worry about the tax now then free agents will have more suitors. Ultimately, at the league level, it serves as a solid middle ground compromise which will protect against an overly punitive tax effect that totally stalls salary spending.

What’s this about escrow?

The league and players also reached a compromise regarding escrow on player salaries that can be roughly summarized as “we’ll figure it out later.” ESPN reported that next season’s escrow amount will stay at 10 percent of the total salaries for the players and then be increased in subsequent seasons, as necessary, to compensate the owners for any shortfall:

If there is a need to reduce player salaries by more than that 10%, that loss will be spread out over that season, as well as the following two — and players can never have more than 20% of their salary withheld in a single season.

As cap guru Eric Pincus points out, the player-friendly escrow arrangement was likely a compromise for an accelerated start to the season:

In short, the players probably argued that if they were going to agree to an arduous return-to-play schedule they wanted to guarantee their slice of the extra revenue that would be created by the relative increase in total games played.

The escrow situation may also become a less significant problem than anticipated. The players have already recouped a significant portion of the additional escrow from the latter part of the 2019-20 season: