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Oklahoma City Thunder: Analyzing the luxury tax

by Berry Tramel Modified: April 12, 2013 at 6:46 pm •  Published: March 1, 2013

Derek Fisher and Ronnie Brewer have hopped aboard the Thunder Express, so now we know what this roster will look like come playoff time. But what will the Thunder roster look like come next October?

The NBA’s new luxury tax has every team a little skittish. The Thunder payroll looks to get in just under the $70 million tax threshold for this season, which is very good news. But what about next year?

According to hoopshype.com, the Thunder is on the hook for $66 million in salaries, covering 10 players:

Kevin Durant: $18.77M

Russell Westbrook $14.69M

Serge Ibaka $12.25M

Kendrick Perkins $8.47M

Thabo Sefolosha $3.9M

Nick Collison $2.58M

Jeremy Lamb $2.11M

Reggie Jackson $1.32M

Perry Jones $1.08M

Hasheem Thabeet $0.91M

That’s a solid team but missing a valuable piece: the Kevin Martin/James Harden role. A sixth man who serves as a No. 3 scorer, behind Durant and Westbrook.

So the question becomes, how will the Thunder pay Martin – or someone like him? The Thunder swallowed hard and offered Harden a four-year, $53-million contract last October. He turned them down, and maybe the Thunder should be thankful he did. How in the world could OKC afford a roster than would cost virtually $80 million in 2013-14?

I corresponded this week with Jon Hamm about such issues. I introduced you to Hamm last summer. He’s a contributor to Larry Coon’s website, which tries to decipher the NBA’s collective bargaining agreement. You can find Coon’s website here. It’s a marvelous tool. I encourage every Thunder fan to check it out, if they care about the details of the salary cap.

A quick refresher on the luxury tax. This season, teams pay $1 for every $1 they exceed the luxury tax. For 2013-14, teams pay an incremental rate of luxury tax — $1.50 per dollar for the first $5 million over, $1.75 per dollar for the second $5 million over, $2.5 million for the third $5 million over, $3.25 million for the fourth $5 million, $3.75 million for the fifth $5 million over and increasing 50 cents for each additional $5 million. Plus, there’s a repeater penalty, which adds a dollar to all of those rates and kicks in for the 2014-15 season if a team was over the threshold the previous three seasons and kicks in every season after that if a team was over the threshold three of the previous four seasons.

Hamm lives in Oklahoma and he periodically keeps me straight on the all intricacies of NBA economics. Here’s a little of Hamm’s insight:

* I told Hamm that it appears to me the Thunder has to find someone – Martin or someone like him – to play for no more than $7-8 million. That would put them into the luxury tax but would not be a terrible hit. The Thunder would have room to get back out of the tax if necessary the year or so after.

“If the Thunder does choose to dip into tax waters and need to find a player like Martin to play for $7-8M, then that player could be Martin himself,” Hamm said. “I just don’t see a team under the cap making a big push for him, though I’ve been wrong before. And teams are going to be hesitant to spend their full mid-level exception (for going above the salary cap) on anyone because of all the tax worry and the fact that using the full MLE can hard cap a team for a year. So the Thunder may be able to offer a deal starting at $6.5M or $7M and bring him back.”

* Adding to the payroll will be some rookies, barring trades. The Thunder has three first-round picks in 2013, including Toronto’s, which would be anywhere from fourth to 14th.

“That’ll cost another $2M or more,” Hamm said. “They also have a late first-rounder that would cost less than $1M, but who knows what they’ll do with it? Could deal it away or draft someone to stash overseas like they’re doing with Tibor Pleiss right now.”

* Using the amnesty clause – which allows a franchise a one-time get-out-of-jail-free card, to waive a player they signed, pay him off and the money not count against the salary cap – remains a Thunder option. Much speculation has centered on the Thunder amnestying Kendrick Perkins.

* “Perk’s deal only has 2 years left so that’s a plus,” Hamm said. “I just don’t see them using the amnesty on him for any reason this summer. But there’s a chance they could the following year, if the stars line up that way. Teams aren’t using the amnesty on useful players with lots of money left on their contracts. Houston did it with (Luis) Scola, but that was part of a cap room-making strategy and they knew someone would put in a bid for a chunk of the remaining money (which Phoenix did).”

* The luxury tax hurts, but it really hurts if you go well past the threshold, then get hit with a repeater rate. For example, if the Thunder is $8 million over in 2013-14, it would owe $12.75 million in luxury taxes. That smarts. But go over $8 million in 2015-16 as a repeat offender, and the luxury tax is $20.75 million.

“All in all, OKC could agree to be a taxpayer for a year or two if they deem it important enough to keep Martin,” Hamm said. “Fortunately, they would be able to get back out of a tax situation fairly easily if they had to, as you say. Or OKC could turn that role over to Jeremy Lamb, if he’s any kind of ready to contribute.”

* Hamm said the repeater rate is something to keep an eye on.

“That’s the tax that I think is going to start tearing down some of these teams like the Lakers and Heat. The Knicks probably won’t care and will continue to throw together teams without a long-term vision. Prokhorov and the Nets are apparently OK with putting together expensive mediocre teams under the misguided idea that they have assembled a Finals contender. Cuban will pony up if he thinks he has a contender built. But otherwise, you won’t see teams that consistently pay the tax year after year as we’ve seen in the past. Just my observation.”

 

by Berry Tramel
Columnist
Berry Tramel, a lifelong Oklahoman, sports fan and newspaper reader, joined The Oklahoman in 1991 and has served as beat writer, assistant sports editor, sports editor and columnist. Tramel grew up reading four daily newspapers — The Oklahoman,...
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