Trade limitations in the tax: Why Marcus Smart's contract is so pivotal

The Celtics have positioned themselves firmly in luxury tax territory this summer with their moves to round out the 15-man roster. First, they rewarded Marcus Smart with a four-year deal worth an average annual value of $12.5 million instead of playing hardball with the point guard with all the leverage in the world. That signing sent the Celtics over the luxury tax line by a couple million dollars, and the team added to that number this month by signing Jabari Bird to a two-year contract that includes a fully-guaranteed deal for the 2018-19 season.

For now, the Celtics are $3.85 million over the 2018-19 luxury tax threshold of $123.7 million, according to cap expert and friend of the site, Ryan Bernardoni. There is no guarantee the C’s will be a tax-paying team this year, since a variety of moves could get them under the tax threshold. However, none of those moves (trading Marcus Morris for no returning salary, etc.) would be beneficial for the Celtics from a basketball standpoint. Given the team’s title aspirations, any action that would hurt the team’s depth seems unlikely.

So we know that Celtics ownership is willing to be hit a bit harder in the wallet with a luxury tax bill this year. However, there are other limitations that impact luxury tax teams beyond just the added expense from the payroll. The team has fewer resources to work within trades and free agency once they enter tax territory.

In part one of our series, we covered some of the new limitations the C’s will have to work with in free agency while operating in tax territory. For our second installment, it’s time to look at the rules for tax teams and trades and why that Marcus Smart contract is so important for Boston moving forward.

Trade limitations of the Celtics payroll

Ainge has been dealing with a good problem to have during his masterful rebuild over the past few seasons when it comes to trades: too many cheap players on the roster

Boston’s roster consisted of max salary players (Al Horford, Gordon Hayward) all earning around $30 million each. Kyrie Irving is on a max deal at a far lesser scale at $19 million, and then there was everyone else. Last year, no one made more than $5.3 million across the roster, leaving a pretty wide gap in the middle-class earners’ bracket.

This type of gap is generally a great thing for team-building and payroll management. Most teams want to be stacked with All-Stars (who generally make a lot) and role players on the cheap. However, a franchise can run into trouble when trying to trade for more talent with this type of team structure.

If you want a player making over $15 million per year, it can be hard to find enough salary to match, assuming you don’t want to include an All-Star piece in the deal. While the Celtics could have added three or four players into a trade to get to that $15 million number for salary matching purposes, it only works if the other team has the open roster spots to accept a 3-for-1 or 4-for-1 swap.

The challenges of these salary matching trades grow greater once a team is in luxury tax territory, primarily because of the parameters of a deal change per CBA rules. For non-tax teams, the restrictions are much easier for deals involving players making $20 million or less:

Non-Taxpayer Trade Rules

For deals involving a player or players making $6.5 million or less, 175 percent of the salary sent out can return. For deals involving players making a combined $6.5 million to $19.6 million (i.e. middle-class salaries), the returning money can go up to $5 million above the total sent out. The only time things get particularly tough for non-tax teams is during big money trades. Any deal involving salary above $19.6 million can only return 125 percent of a deal (plus $100,000).

Taxpayer Trade Rules

For tax-paying teams, the restrictions are much tougher. They can only take back 125 percent of the salary (plus $100,000) in any trade, no matter how much money was sent out. Essentially, any trade for a taxpayer team is handled like a big money deal for non-tax-paying teams.

That type of restriction can be limiting for a tax team if it doesn’t have a lot of movable salary on a roster (i.e. the Celtics). Before the Smart deal, the only guys on the roster making between $3-6 million dollars for next season were Jayson Tatum, Jaylen Brown, Marcus Morris and Aron Baynes. Tatum and Brown aren’t getting moved unless it’s for a superstar, Baynes has a no-trade clause and Morris only makes $5.3 million. Finding the necessary money to trade for any player making over $10 million would have been a tall task for the Celtics this season if they hadn’t come to a long-term deal with Smart last month.

If Smart had settled for a qualifying offer (roughly $6 million), he would have had a no-trade clause as well, which would have added to the C’s roster movement limitations. However, his four-year deal at generous terms ($12.5 million AAV) gives the C’s a building block salary for trades of any kind. They can use him for salary-matching purposes in a blockbuster down the line (i.e. Anthony Davis) or trade for a player in a similar price range ($10-20 million) without gutting the roster to try to meet the salary threshold of said deal.

There’s no guarantee the Celtics will be looking to make any major trades during the upcoming season, but Smart’s contract gives them the flexibility to do so (without moving any potential All-Stars in the process). Assuming he plays up to his salary (or somewhere close to it), Smart gives the C’s front office some options than they wouldn’t have had otherwise while in tax territory, especially since the team has so many draft picks they can attach to him in any hypothetical deal (Memphis, Sacramento, LA Clippers, etc.). 

Smart alone won't land anyone of note for Boston. However, his name attached to some lottery picks will open up quite a few possibilities for the Celtics over the next couple seasons. Stay tuned.

You can check out Part I of our tax series here