What does ‘Luxury Tax’ imply in the world of professional sports, especially NBA? Read on to know along with its implications on teams
In general terms, luxury tax is an indirect tax placed on expensive and non-essential goods and services. This increases their price and is only incurred by people who purchase the product or service. But what does it mean in the world of professional sports, especially NBA? Read on to know.
What Does Luxury Tax Mean In Sports And NBA?
In terms of sports, luxury tax simply refers to an amount paid by a team when they have an aggregate payroll that is over a certain predetermined amount set by the league. The main purpose of this luxury tax is to level the playing field and balance necessary to maintain fan interest in a sport. Money is taken from higher revenue teams and given to lower revenue teams. The tax also makes sure that not all talented players end up in the same team.
For example, the revenue brought in by the MLB team New York Yankees is double than that of the Pittsburgh Pirates. In order to have fair competition, the Yankees will pay this luxury tax. The League can either divide the money from the tax among smaller teams markets or use it for other pre-defined purposes.
Among the most popular leagues, Major League Baseball and the National Basketball Association have implemented this system. The current luxury tax threshold in Major League Baseball is $178 million. If the total player salaries and benefits of one team add up to exceed this amount in a year, they will have to pay a luxury tax.
Luxury Tax In NBA
While the National Basketball Association (NBA) does implement luxury tax, its use is limited because of the existing soft salary cap rule. This rule limits the amount of money a League can spend on players’ salaries. The luxury tax threshold for the 2021-22 season is set at $136,606,000 and currently ten NBA teams over this tax line. Thus, the league’s luxury tax payments are expected to be higher than before.
Warriors and Nets way out ahead on spending among NBA clubs. At $306 million, Nets payroll + luxury tax bill is a third more than Bucks (but Warriors top them by more than $50 million.) https://t.co/4EIh9GnO2M
— NetsDaily (@NetsDaily) August 6, 2021
For every dollar a team surpasses the limit with, they pay an amount of tax back to the league. Also note that the rate goes up in case are Repeat Offenders and have thus paid in 3 of the 4 league campaigns before. However, they can get below the tax threshold before the league’s trade deadline.
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