The Lakers, The Luxury Tax And You

Kurt —  June 18, 2009

LA Lakers at the LA Memorial Coliseum
Now the discussion begins about how we get this feeling again next year.

And we can’t start talking seriously about offseason moves until we have a discussion about the Lakers salary and financial situations — specifically the luxury tax. Sure, there is a soft salary cap in the NBA but that is completely irrelevant in the Lakers case — they are already about $10 million over that number. That limits the free agents from other teams the Lakers can sign — they can only use the mid-level exception (which will be about $5.6 million).

But don’t expect them to use that. The reason is the Luxury Tax — every dollar the Lakers are over that tax threshold number they pay a dollar in tax.

To help with this, I asked a few questions of Hoopsworld writer Eric Pincus (check out his latest post here on “How Amazing Happened”). He’s a long-time Lakers writer with a great understanding of the financial side of the game.

According to Hoopshype — the Lakers have a salary of $74,105,091 on the books for next year. That is not including anything for free agents Lamar Odom, Trevor Ariza and Shannon Brown. We’ll let Eric explain just what that means:

If the tax threshold stays at $71.15 million (the number it was this past season), clearly the Lakers have some issues.

The market hasn’t been set yet but I do believe the Portland Trail Blazers will make Ariza an offer, even if it’s just to drive up the price for the Lakers. Just playing around but let’s say the Lakers get all three guys back for $16 million combined. You can break that up however you’d like . . . it’s a guesstimate and it could be low or high . . . but it’s something to work with.

Without taking into account their draft pick and assuming they stick with DJ Mbenga and Josh Powell (because we need some sort of constant for this illustration), the Lakers total payroll would be $92 million BEFORE tax.

Throw in an extra say $20.9 million (for the tax) and Dr. Buss would be looking at a grand total of $112.9 million!!!

To put that in perspective, the team just won the ring with a payroll including tax at about $85.4 million. It’s a lot to ask of any owner to add on some $27.5 million to the budget, especially in a down economy.

It was rumored mid-season that Buss would go as high as $100 million including tax next year, but Pincus (and others) say the Lakers are now reconsidering that number in the wake of the championship. But realize that the highest pre-tax payroll in the NBA last year was the Knicks — funded by the deep pockets of Cablevision — at $96 million.

All of this begs the big question — can the Lakers sign Ariza and Odom both? Again Pincus.

The big question will be competing offers when it comes to how much for Odom and Ariza. If the bids don’t come – since there are very few teams under the cap (Portland, Detroit, Memphis, Oklahoma City, Sacramento Kings and conditionally a few others) – the Lakers would be competing against other teams over the cap. If the most Odom and/or Ariza are offered caps out at the Mid-Level Exception (still not set but currently $5.6 million), the LA is obviously in a better position. I imagine that Ariza will get bigger offers but I’m not sure Lamar will.

Then there is the talk that Kobe could opt out and sign a new Max contract, but in the short term that would be good for the Lakers Pincus notes.

Bryant, as a free agent, can only sign a contract starting at 5% more than he made this year. That’s about a $700k pay-cut (his current contract allows for a higher raise next year). Frankly, I’d expect the Lakers to want Kobe to opt-out and re-sign for a number of reasons . . . primarily longevity but the extra $1.4 million they’d save next year wouldn’t hurt.

In the middle of the year, the Lakers traded Vladimir Radmanovic in a move that was about saving money — an estimated $16 million over several years. Pincus thinks the Lakers could make cost-saving moves.

If the Lakers do end up with a monster payroll, it’s important to remember the tax isn’t computed until the following July. In fact, the Lakers still have opportunity to save money on the 2008/9 tax – if, for instance, they could find a team with a big enough trade exception to take Adam Morrison. The onus will be on General Manager Mitch Kupchak to find suitors for players like Morrison or Sasha Vujacic to trim salary. That’s not an easy task since neither has too much on-court value presently – and Sasha’s deal goes through 2011. It might cost a Jordan Farmar to make one of the bigger deals disappear. That’s a judgment call on the Lakers part since there doesn’t appear to be a long-term solution to replace Derek Fisher as starter on the roster. If Farmar’s that guy, then they don’t move him. If not, do they deal him before getting his replacement? Can that be Brown? Sun?

Another way the Lakers could save money is to trade whoever the do draft at 29. I expect that will be a cost saving move regardless — either a player that can be stashed in Europe for a couple years or someone to trade away. The Lakers will be using the Summer League to find another player or two to fill out the end of the bench cheaply if they can resign both Ariza and Odom.

But right now the ball is in Jerry Buss’ court with how much he wants to spend.


Kurt

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