The Boston Celtics are a popular subject right now. After all, there is less than a week until the trade deadline and the Celtics sit atop the East with a treasure chest of goodies burning a hole in their pocket. The defending conference champions, the Cleveland Cavaliers, are in disarray and the Celtics are maintaining a tenuous lead over the looming Toronto Raptors for the right to homecourt. Even with Gordon Hayward missing almost all of the season, the opportunity seems ripe for the Celtics to crack open their asset wallet, and get a little bit of help to push this team to a conference championship.
However, the franchise is set up for a prolonged period of excellence which means that decisions need to balance today, tomorrow, and many tomorrows to come. A major factor in this is the ticking clock on Kyrie Irving’s contract, which he will almost certainly opt out of in 2019. When that happens, the financial implications will be significant for the Celtics and they may wish they had used this time to plan around it. In order to understand this question of ‘when’, however, we must first understand the ‘how’ of player maximum contracts work.
Understanding Player Maximums
I’d like to start laying this out by exploring the salary structure of the Boston Celtics “Big Three” that were not drafted by the team. That is to say, Al Horford, Gordon Hayward, and Irving. As is typical for a player who got his contract most recently, Hayward is the highest paid on the team this year and is likely to remain so through next year. He receives a 30% player maximum on this years cap. Al Horford is not far behind at $27.7M, having received a 30% player maximum on LAST year’s cap. Both are receiving the maximum pay raises that they were eligible for. The Celtics are paying a little under 60% of the salary cap for just these two players.
That brings us to Kyrie Irving, who is also on a maximum contract. However, he is making “only” $18.8M this season and will receive about $22M less than Hayward, and about $18M less than Horford, over this season and next. In fact, the difference between Kyrie and Hayward’s salary is more than the total season salaries for the team’s 4th and 5th highest paid players, Jayson Tatum and Marcus Morris, combined. Why is that?
The answer has to do with player experience, changes to the cap, and the way player maximums are calculated. When a player signs a new contract, the maximum amount they are eligible for is based on the salary cap in the year that they are signing. A player’s maximum salary is expressed as a percentage of the salary cap in the year they sign, with maximum annual raises that are a percentage of that first season’s salary. A player who signs a “30% max contract” does not get 30% of the cap each season, they get 30% of the cap in the season that they sign, and then a fixed annual raise.
For example, the Gordon Hayward’s contract was totally based off of a salary of $29,727,900 because that was his player maximum in the year he signed it (2017-2018). His salary for all subsequent years is the previous year’s salary, plus 5% of $29,727,900. The salary cap figures in 2018-2021 have no impact on his salary.
This is important because the salary cap can change a lot from year to year, and that changes just exactly how much money a “player maximum” is.
For example, when Kyrie signed his rookie extension in 2014, entering the fourth year of his contract, the salary cap was $63.1. Kyrie was signed to a full designated rookie extension and five years were added onto his contract at his player maximum, which was 25% because he had under seven years of experience. This locked Kyrie into a contract into 2019 where his salary was totally independent of fluctuations to the salary cap. His contract simply continued to grow by 7.5% each year, the maximum he was eligible for at the time of signing.
Meanwhile the cap, in an unsustainable and historic way, jumped quite a bit during this time. As a result, Kyrie is in the final two years of a 25% player maximum contract calculated off of $63.1M cap instead of Gordon Hayward’s 30% player maximum calculated off of $99.1M cap. That’s how you end up, in 2018-19, with Gordon Hayward making $11M than Kyrie Irving.
An exceptional young player on a rookie scale contract is the most valuable asset in the NBA, and that isn’t just because they have more years left in their career. They literally provide the most surplus value on a year to year basis. Even if you give them a full player maximum extension after their contract runs out, they will be more valuable and easier to trade than a similarly skilled veteran player.
Kyrie Irving, who was drafted less than seven years ago, is in the twilight stage of “being very underpaid because he was young”. Jimmy Butler and Kawhi Leonard are on identical underpaid salaries for similar reasons. The three are universally considered among the top-20 players in the NBA, are all “max” players, and yet make about the same money as Jeff Teague and Allen Crabbe.
You may still be look at these numbers and wonder why this should matter too much. After all, the difference I’m talking about is a difference of between three and four million dollars to teams that are typically over the cap to start with, right?
Mad Tax: Very Owed
For this next part, I first want to explain exactly what that the four lines of demarcation are in the NBA, as all of their titles can be a bit confusing, and they can run against each other a bit. These important spending thresholds are the salary floor, the salary cap, the luxury tax line, and the apron. The graphic below can help you understand roughly where they are and what they do.
For the purposes of what I’m going to be discussing today, the most important part is the luxury tax line, which you can see the Celtics are currently below.
It’s commonly misunderstood exactly how the luxury tax functions in the NBA and misconceptions about how punitive they are can be attributed to the name. Typically, a “tax” on something means that you are being charged a fraction of what you are spending such as with sales tax, or when taxes are deducted from wages being paid to workers. This familiarity with how the word ‘tax’ functions outside of the NBA incorrectly frames how it functions inside the NBA, where the money being spent is a fraction of the tax and not vice versa.
The luxury tax is subdivided into brackets, depending on how far over the tax line a team is. The further over the line you get, the harsher the financial penalty. This isn’t a matter of paying 15% versus 30% as the name ‘tax’ may imply. Instead, it can be the difference between paying 150% or 375%. This graphic shows how rapidly the tax expands as money is added.
For example $15M over the tax line institutes a tax payment of $28.75M (The sum of $7.5M + $8.75M +$12.5M) for a total cost of $43.75. Further complicating tax spending is what is known as the ‘repeater tax’ which makes the penalties even harsher.
The repeater is triggered by paying the luxury tax in three out of four years, giving teams incentive to try to end the year below the tax line if they are close to it. The Celtics may not be taxpayers next year, depending on the Lakers pick and the restricted free agency of Marcus Smart, but more than likely will be. Paying a few million in luxury tax is not much of a problem on it’s own but, because of the repeater tax, unnecessarily wandering into the tax too early can cause stiff financial penalties down the road.
As I laid out earlier, Kyrie Irving is significantly underpaid today but that will be rectified in the summer of 2019. Kyrie will be moving from a 25% max contract signed based on a $63M cap to a 30% max on a projected $108M cap, a difference of over $12M/year. Should Al Horford also opt out of his deal, he would also likely need to be similarly paid, as the Celtics will have no meaningful way to replace a player of his caliber. Jaylen Brown’s extension will also be right around the corner, followed by Jayson Tatum’s. This means that, starting as soon as next season, the Celtics will become a tax-paying team with a smaller number of players taking up a larger percentage of their budget each subsequent season.
This is why an extra $4M here and there will make an enormous difference to what the Celtics are able to do. I fully expect Celtics ownership to be ready, willing, and able to pay the tax. However there is a limit to what is realistic and the draconian penalties of the repeater tax stretch that to the bursting point very quickly. In the repeater tax, adding Marcus Morris would cost about as much as adding Kyrie Irving. Deeper in the repeater, adding a mid-level exception player will cost as much as adding a max-level player.
No matter what, the primary function of an NBA team is to make money, and no amount of contention will allow that goal to go unattained for multiple years. If you don’t believe me, pay close attention to the coming years of the Warriors and what is going to happen to Draymond Green and Klay Thompson when their relatively cheap contracts near their end. The Celtics will pay the tax because they will likely have a contending team, and keeping the large pieces in place will require it. However, not planning right now for the time when the Celtics will be taxpayers can significantly impair the title window. It will be the difference between filling out the roster (and budget) with third and fourth year first round picks and ring-chasing veterans instead of second rounders and G-Leaguers on the cheapest minimum salaries.
The Celtics are good right now and sending out first round picks to plug their holes right now seems like the right thing to do. There are no guarantees for tomorrow and we know what they are today. However, the players the Celtics select with their first round picks this season and next will make up the rotation of a title contending team for seasons to come. Trading those picks opens gaps in the franchise that have to be closed with future moves. That’s a cycle that other teams have experienced, to their detriment.
That is what is at stake for the Celtics this trade deadline. It’s about unnecessarily hurting your upside and title chances in three years, because Shane Larkin and Abdel Nader currently fill out the roster and trading first round picks at the deadline is what other playoff teams do. Something else that most other playoff teams do is not win championships. The Celtics would be wise to not dim their own bright future just so they can light a candle now.
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