Why the NBA luxury tax line matters so much for the Celtics offseason possibilities

As the negotiations from the NBA and NBPA heat up this week surrounding the particulars of a revamped 2020-21 regular season, there is one element of those talks Celtics fans should keep a close eye on: Where the luxury tax falls for the 2020-21 season.

Bobby Marks of ESPN.com reported Monday that teams throughout the NBA are strongly advocating for the projected luxury tax threshold ($139 million) for 2020-21 to remain in place despite the fact that the salary cap estimate could drop from its original projection ($115 million) in the wake of declined revenues caused by the coronavirus pandemic. Usually, those two numbers (salary cap and luxury tax) are tied directly, with the tax going up and down in conjunction with the final cap numbers. The league could make a one-time adjustment on that front this season as they rework the CBA in negotiations with the players.

There is good reason for there to be a lot of support for this stance from both sides of the NBA aisle. From a team management perspective, several franchises have already made great salary commitments to their rosters for next season with the projected tax number in mind ($139 million) before the pandemic hit. In the wake of a significant decline in revenue for all franchises over the past several months that is already leading to cost-cutting, the last thing most teams would want right now is dealing with a far lower tax number than initially projected, which would cost most teams million more in luxury tax penalties and limit roster moves this offseason due to that additional spending.

The players union should also be pushing for a higher tax number for that very reason. If teams are losing millions more than expected due to luxury tax penalties, that’s millions of dollars gone that could be going into the pockets of the current free-agent class. All players around the league are going to have to take a 20-30 percent paycut in all likelihood due to escrow holdings as the NBA attempts to balance the budget in the wake of billions of revenue losses, but the current free-agent class will be squeezed even more than that if most NBA teams are not spending significantly in the wake of a cap and tax reduction.

So how exactly does all of this relate to the Celtics situation specifically and why the Hayward contract situation looms so large as a swing factor within it?

Let’s look at their current payroll situation. Assuming Gordon Hayward and Enes Kanter plan to opt-in (barring an extension being reached with Hayward), they have $132 million committed to 12 players next season.

Kemba Walker ($34.3 million)
Gordon Hayward ($34.1 million – player option)
Jaylen Brown ($23 million)
Marcus Smart ($13.4 million)
Jayson Tatum ($9.8 million)
Daniel Theis ($5 million – non-guaranteed)
Enes Kanter ($5 million – player option)
Romeo Langford ($3.6 million)
Vincent Poirier ($2.6 million)
Grant Williams ($2.5 million)
Robert Williams ($2.0 million)
Carsen Edwards ($1.5 million)

Add in salary commitments for a couple of first-round draft picks (the Celtics own three in 2020) and any notable free agency upgrades and it won’t be long until the Celtics are a tax team even if the original tax projection stays steady at $139 million. On the flip side, if the tax number just remains steady with this current season ($132 million), the C’s could be looking at an enormous tax bill if they want to improve the roster.

The math changes for the Celtics significantly however if they manage to get Hayward to agree to an extension at a far lower number than his current $34-million salary for 2020-21.

Let’s say the Celtics and Hayward agree to three more years at $25 million per year to replace the final year left on his current deal. That $9 million reduction in salary (34-25 = $9 million) for next season shrinks the C’s current salary commitments heading into next year down to $123 million. Depending on what they do with their draft picks (keep, stash or trade some), they would have a lot of more flexibility with their offseason moves with the additional payroll flexibility that would allow them to add and remain under the luxury tax threshold (if it holds firm at $139 million). Those potential advantages would include:

1. A full mid-level exception to spend on free agents: There are two types of mid-level exceptions available around the NBA during any given offseason for teams without salary cap room. Most teams that don’t have cap room have access to the non-taxpayer mid-level exception, which is projected to be worth $9.7 million for the 2020-21 season. Teams using this exception can offer four-year deals to a player (or divide the money between several players) with five percent annual raises worked in. Any team that uses the full MLE automatically enacts the apron ($6 million above the luxury tax) as a “hard” salary cap for the rest of the year. Essentially, it means that team can’t go over that threshold no matter what. Therefore, most tax teams shy away from using the full MLE so they aren’t hard capped at the apron (in case they need to add more salary for whatever reasons). If the Celtics give themselves more leeway under the tax with a Hayward extension, they would have the flexibility to use this full mid-level money with room to spare for other spending.

This would be a far greater alternative for Boston than getting stuck using a $6 million taxpayer mid-level exception. Not only is the taxpayer midlevel worth roughly $4 million less than the full mid-level but it can only be offered for a maximum of a three-year deal as well. Given the lack of top-tier talent on the free-agent market this fall and the high number of teams with contending aspirations in both conferences, landing a useful mid-level free agent gets a lot easier when the Celtics have the same amount of cash/years to offer as most of the competition in both conferences.

2. A bi-annual exception ($3.8 million/year) to offer free agents: This is a free agent tool that the Celtics haven’t used for several years since they have either been under the cap or in the luxury tax in recent years. However, in what is expected to be a depressed free-agent market in the wake of reduced revenues, having $3.8 million to throw at a player could allow the Celtics to make another useful addition to the roster on top of their mid-level exception. Other tax team contenders (Philadelphia, Brooklyn, Golden State) will only have veteran’s minimum to throw at players beyond their own taxpayer mid-level exception so this could be a weapon for the C’s to help convince an aging free agent looking for a chance to win to come to Boston over a similar contender.

There are numerous other advantages for Boston to stay out of the tax (easier to make trades, avoiding repeater tax later this decade) but these are the two big ones for the present. Again, these options are only available to Boston if a couple of things happen.

1. The luxury tax projection stays artificially high in line with its original projection
2. The Celtics pull off a Gordon Hayward extension (or pull off a trade that reduces payroll)

If the Celtics and other teams get the answer they want on part one of this equation this week (a high tax number), it should open the door for Danny Ainge to running it back with their core next season with some significant reinforcements being added to the equation.