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NBA Teams Could Face Upto $28.75 Million Penalty Due To Luxury Tax Problems: Report

A lowered NBA salary cap for the league's 2020-21 season would ultimately affect teams who have higher payrolls, specifically those with a luxury tax. 

NBA

The NBA salary cap, which has been a major point of discussion after the league's suspension in March, will be lowered for the 2020-21 season as per latest reports. While the league is yet to make an official statement on it and trying to minimize financial loss as much as possible, pay cuts and a lowered salary cap are apparently inevitable. However, a lowered salary cap will ultimately affect teams who have high payrolls, specifically those with a luxury tax. 

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NBA salary cap: NBA luxury tax to face dramatic consequences due to lowered salary cap

Teams which exceed the tax limit ($132.6 million), face penalties depending on how much a team is over the limit. For example, if a team is $1 million over the tax limit, they will have to pay $1.5 million in luxury tax. The most a team can pay in tax is around $7.5 million for the first tier ($1-4,999,999). The next tier is for teams with the limit exceeding from $5,000,000 to $9,999,999.

For the second tier, a penalty of $1.75 per dollar is levied, with the incremental maximum being $8.75 million. The third tier, from $10,000,000 to $14,999,999, has a penalty of $2.50 per dollar, where the maximum fine will be $12.5 million. From the third tier, through $5 million intervals, the penalty increases to $3.25, and then $3.75, with a final addition of $0.50 for every $5 million a team exceeds the salary cap, after going over the $20 million tax line.

As per Forbes, a team which is exactly $14,999,999 above the luxury tax line, will have a tax bill of $28.75 million. The number is calculated by adding all the individual incremental maximums together. 

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While teams under the luxury cap line will pass the penalties, teams like the Philadelphia 76ers will have to face the maximum penalty. The Houston Rockets, who are reportedly looking at a salary hit of around $130.4 million, will be approximately $2.2 million below the line. This is assuming this season's luxury tax line is applied to next year's salary hit.

If the tax threshold dropped below around $7.2 million, would find themselves in the second tier of the tax penalty. The 76ers, which have an estimated cap hit of $147 million, will find themselves in the fourth tier. Their cap hit is approximately $15 million above this year's tax line. 

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NBA Amnesty clause: What is Amnesty clause? How will teams use the NBA Amnesty clause?

While the penalties are very high, the teams could use the NBA amnesty clause if deemed to be necessary. Introduced in 2005, the NBA amnesty clause enables teams to remove the cap hold of a player who was maybe overpaid or has not delivered on their contract. In 2005, players like Michael Finley, Reggie Miller, Alonzo Mourning and Vin Baker were amnestied.

While the team will still honour the contract, the salary caps will be removed. The clause was brought back in 2011, where the teams let go of Carlos Boozer, Brandon Roy, Drew Gooden and Luis Scola. Currently, organizations who are financially equipped to deal with the suspension and luxury tax problems need to use the amnesty clause.

If a team like 76ers were to use the clause, Al Horford could be removed from their books. The Rockets, on the other hand, could remove Eric Gordon's remaining $54.6 million. Teams like Atlanta Hawks or Detroit Pistons, who currently have plenty of cap space, are the few teams which could come out of the situation penalty-free.

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