Hard Cap: Who Really Gets Hurt?

Zephid —  August 3, 2011

On a day when the NBA has fired the first volley of legal action against the Players Union, there’s a lot of talk about who is to blame and who is holding up negotiations. One of the biggest issues at hand is the Hard Cap.

Many of us are probably fairly knowledgeable of what a hard cap entails, but a little refresher seems in order. In the previous CBA (the one that just expired), the NBA had a “soft cap,” where teams could sign whoever they wanted up to a certain limit (a little over $58M last season). However, once teams reached that limit, they could only sign players in excess of the limit using various exceptions, including the Mid-Level Exception (once a year, each team can sign a player at the average salary of the league), the Bi-Annual Exception (once every two years, each team can sign a player to a nominal amount of money (around $1-2M per year, for max 2 years), Traded Player Exceptions (when they make a trade in which they take on additional salary), and various “Larry Bird” Exceptions (whereby teams are allowed to re-sign their own players to larger contracts that put them over the cap). To prevent teams in bigger markets from continually accruing salary and simply outspending other teams, the CBA included the luxury tax, which forced teams to pay an extra dollar for every dollar they were over the luxury tax limit (somewhere around $70M last season). This served to limit a number of teams from overspending, the San Antonio Spurs being a prime example of a team that was very leery of exceeding the luxury tax limit for many seasons.

However, if teams could pay the extra money, they could just keep spending and spending away. Teams like our Lakers and Dallas paid out over $90M each this past season, 3 times more than the Kings and Nuggets have on their current payrolls for this season. Thus, a lot of small market teams (and fans of those teams), have started to call for a hard cap. A hard cap would make the salary cap limit absolute: there would be no exceeding the salary cap, regardless of the circumstances. The NFL currently has a hard cap system, and many attribute the parity of that league to the hard cap.

Tim Donahue of Eight Points, Nine Seconds, a Pacers blog, recently wrote an article claiming small markets need a hard cap. Donahue makes the case that a hard cap rewards disciplined spending and good management, something that many small markets have (such as Portland and Oklahoma City). Since large market teams can’t simply outspend the small market teams, the performance of the team would depend entirely on whether the team’s management could put together a cost-effective group of players that fit as a team.

That sort of argument seems to be the norm. Royce Young, however, a blogger for the Daily Thunder as well as CBSSports, makes a strong case that a hard cap could make keeping stars in small markets very difficult. One of the most useful parts of the past CBA were the various forms of Larry Bird Exceptions, allowing teams to keep their own players, even if doing so meant they would skyrocket past the cap. While this didn’t prevent Lebron James from bolting Cleveland, it did help Dallas keep Dirk Nowitski (and then win a championship at our expense… #anti-coping). However, if a hard cap is instated, a team like the Thunder may have a lot of trouble holding onto their good young players, like Russell Westbrook, James Harden, and Serge Ibaka. If all of those players want extensions, the Thunder will be extremely strapped for cash under a hard cap, considering Westbrook will almost certainly be a max level salary player and Ibaka will also command a high salary as a quality big man. Thus, even if teams draft smartly and make good decisions, it may become impossible for teams to hold on to their star players.

So does a hard cap hurt small market teams or large market teams? It certainly hurts dumb teams more than it does smart teams; any team willing to give Rashard Lewis $120M or similarly for Gilbert Arenas will get severely punished by their own cap inflexibility. Most would say it prevents large market teams from outspending small market teams, and for the most part, I agree. The Lakers would certainly have to give up one of Bynum, Gasol, or Odom to be under the salary cap, and it would have to be for almost nothing in return. A hard cap would definitely level the playing field in terms of spending power not dictating team strength.

However, a hard cap would produce a new imbalance in the NBA landscape, being that some teams are in states with low or no state income tax. California, for instance, had a state income tax of 11% for people making over $1M. Compare that to Florida and Texas, which have no state income tax, and it becomes clear that tax policies have a strong effect on where NBA players want to sign. A player could sign in Orlando for $9M and make the same amount as if he signed in LA for $10M.

As for whether a hard cap hurts the players or the owners, it definitely saves the owner’s from feeling forced to overspend on players. But as Henry Abbott points out in this very insightful post on TrueHoop (rare, I know), the NBA already has a de facto hard cap in the form of BRI sharing. In the previous CBA, the players received 57% of BRI, and that’s it. If 57% wasn’t enough to cover all player salaries, the players would simply receive less money (taken out ahead of time in the form of escrow). So while a hard cap may limit the value of some contracts, the CBA still dictates how much of BRI the players will receive, and in turn how much they are paid.

But you know who the real loser is in all of this hard cap business?: The NBA Trade Machine aficionados. A hard cap would make trade conditions extremely stringent, salaries having to match almost dollar for dollar, given that teams won’t be able to exceed the cap. And I don’t buy any of this “flex cap” crap the owners are pushing, because once you reach the flex cap limit, it becomes hard cap, plain and simple. Gone will be my days of somehow finagling Andre Iguodala onto the Lakers roster (and with it, my hopes and dreams!). In this respect, I think a hard cap hurts the NBA, because trade scenarios and MLE signings are some of our favorite topics of discussion (no matter how speculative they become). Yet the hard cap will almost certainly level the playing field for small market teams. Thunder fans just shouldn’t come complaining when they have to give up Serge Ibaka for nothing.


Zephid

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