When should NBA contenders fire their luxury tax bullet?

Stephen Dunn

Eventually, would-be NBA champions need to pay the luxury tax. But when should they pull the trigger? The Thunder, Clippers and Bulls have taken different approaches -- and it's too early to say who's right.

Say you were in a small market, and you had a superstar player on your team. Say you aren't owned by someone with the first name "Sheikh," and thus aren't blessed with the unlimited reserves to be able to pay to acquire/re-sign whoever you want, whenever you want. Say you operate on what is in relative terms a tight budget, and that this budget, in light of the tougher luxury tax penalties in the league these days, prevents you from paying luxury tax for the majority of seasons. And say that these circumstances combine to create a situation where you can only pay tax for a one- or two-year period.

At what point do you fire that bullet?

This is not merely a hypothetical question. This is a genuine problem, a tangibly real scenario affecting many franchises today, and perhaps soon to be affecting others. The league's desire to reconcile market inequalities via the luxury tax system has presented a situation whereby those with limited resources have essentially even fewer resources than before. Paying a "bit" of tax for a "while" isn't as easy as it was, simply because a "bit" of tax costs more than ever.

This, then, presents the problem of when to capitalize on the short term whilst maintaining the bigger picture. It relies upon foresight, prediction, and timing. We can see different approaches to this problem in multiple current NBA team building scenarios, all featuring limited budgets and big stars.

The Chicago Bulls, a large market team that chooses to operate in the belief that it is not, paid the luxury tax for the first time last season. They had positioned themselves to do so with moves made long before Derrick Rose tore his ACL, notably with the signing of Carlos Boozer, but also with the signing of Rip Hamilton. You don't sign Rip Hamilton to a deal paying $5 million annually when you are already up against the luxury tax threshold unless you are prepared to pay a bit of tax. And while Hamilton was never going to be the final piece, he was supposed to be one of the final pieces. Any team armed with an MVP surely has an obligation to make a title push, and the Bulls were doing so.

Of course, as we now know, it did not work out. Rose got injured, Hamilton aged quickly, and the Bulls went back to the feisty underdog identity of the early Scott Skiles era in lieu of having the talent to be competitive. They fired their bullet at a time that would take advantage of the primes or near-primes of Boozer, Hamilton, Joakim Noah, Luol Deng and Taj Gibson, rather than waiting for Rose to hit his own. Yet now because of the unforeseen injuries, it was all for nought, and they have wasted their long-awaited bullet on nothing but two seasons of mere decency.

This demonstrates the quandary brought about by the new tougher luxury tax penalties. Whilst paying luxury tax is not the be all and end all of competitive spending, there is a direct correlation between it and success, with only a few anomalies. It is an acceptable leap of logic to conclude that the luxury tax, whilst not synonymous with the bottom line, is such a significant weight upon it that its payment represents a great push to those paying it. Furthermore, the perceptions that come with spending into the luxury tax are important to potential or actual free agents, who want to see this commitment from a team before any commitment of their own. In this regard, those with limited resources are further penalized. But they are not entirely written off.

It is possible to be a small market team, have a maximum salary caliber player, be competitive for your conference title, and not pay the luxury tax. San Antonio has long done it — although they've paid the luxury tax on five occasions, it's totaled just $12,597,554, $8,810,302 of which came in one season (2009-10). Currently, Memphis can be seen to be in that territory, as can Golden State, and Oklahoma City also are doing it albeit only via the James Harden deal (whose significance to this discussion will be explored below). To do it requires fiscal prudence, some bargains, some steals and some luck. It can be done. It has been done. And it will be done again.

Of those teams, only San Antonio has ever won the title. The others still need more. And this, of course, is difficult to achieve without significant payroll increase. Those who cannot camp out above the luxury tax line, spend a significant amount of tax more than perhaps once or twice, or perhaps even spend over it at all, need a stroke of luck and impeccable timing to compete at the very highest levels. Timing is everything. And timing is hard.

The above Bulls example demonstrates the problem with timing the push. Faced with a two window quandary, they pushed for the first one, failed, and now may have jeopardized the second. Even if Rose returns to where he was, the Bulls might have used their entire luxury tax budget already. History suggests the budget was very small. Elsewhere, we find the L.A. Clippers and the Oklahoma City Thunder, two of the six teams never to have never paid luxury tax, both also with a two window dilemma. One is in line to pay the luxury tax for the first time in its history. The other just traded a star to avoid it.

Both have two superstar players. Oklahoma City has a 25-year-old Russell Westbrook and a 25-year-old Kevin Durant. Los Angeles has a 24-year-old Blake Griffin and a 28-year-old Chris Paul. The primes for the Thunder two coincide; the primes for the Clippers duo do not. This is of prime importance when it comes to the timing of the push. Working on the assumption that the Clippers and Thunder both only have one such one- to two-year luxury tax bullet to fire — based on their never having paid the luxury tax before, and previous spending cuts, it is hard to conclude anything greater than that — the question becomes, when do they fire it?

While it is by only a small amount, small enough that they can still realistically get under it without losing any of the significant talents that make them competitive, the Clippers are nevertheless due to pay luxury tax this season for the first time in their history. They are doing so because they have the best point guard in the sport, at a time when he is as good as he is ever going to get. Channeling the aforementioned logic of being mandated to push when you have an MVP, which Chris Paul could well be, the Clippers have taken him on and still continued to build a team, doing so without the stinginess of Clippers teams of the past. Los Angeles has a legitimate championship contender for the first time in their franchise history, and thus they have their first ever what we might term "extraspending" window. When taken along with Paul's age, they would be foolish not to fire that bullet right now.

This proactivity also has the side effect of what it means for the second window, one which will open with Blake Griffin's prime. Griffin has an early termination option after the 2016-17 season, when he will be 28 years old and, barring disaster, at his best. As a maximum salary player, his price tag is not the bit that needs any negotiating — the Clippers need to sell Blake on their viability as a competitive, inviting team. That sales pitch began on the day he was drafted and continues to this very day. Griffin only has incentive to re-sign with the Clippers if the Clippers can prove (or at least strongly suggest) that doing so will give him the best chance at a title. As we have explored in previous pieces, loyalty can be bought with money, but it is best bought through success. Paying tax now is hugely important to this.

Perception of success, determination and winning comes through spending, and players who can afford to be picky value these perceptions strongly. Dwyane Wade reminded us of this when he briefly hit the market back in 2010, when he spoke of how loyalty plays a part in a player's decision to stay or switch. Loyalty and commitment can be demonstrated through spending — it follows that the more you spend, the more you are prepared to do to win, the more you can offer your players. In finally touching the tax, the Clippers finally start to send this message. It will be a strong message, should they follow through with it. And it is one they surely must do. If they cannot pay when they have a prime Chris Paul, then pleas to the extent of "stick with us, Blake, we'll do what it takes to win" seem painfully hollow.

Perhaps, then, the very existence of the second window is dependent upon the management of the first. However, when the Thunder ran into this same situation, they left with a far different outcome.

The James Harden extension dilemma was the ultimate test of whether Oklahoma City was prepared to pay significant luxury tax to make a title push. The answer, it appeared, was no. The subsequent free agency and departure of Kevin Martin reaffirmed it. Both left the team, depleting the strength of the basketball product, for the sake of the long-term financial outlook. In allowing this, the Thunder directly rejected the notion of being forced to pay the cost when armed with an MVP candidate.

As good as Durant and Westbrook are, this is not their prime.

But perhaps the answer was less of a "no," and more of a, "not yet." Perhaps, if the Thunder concluded they had two windows and one bullet, they were waiting for the other one. As good as Durant and Westbrook are, this is not their prime — indeed, in basketball terms, it is not especially close to it. Those primes will come two or three years from now, when both hit their apex and (not coincidentally) need new contracts.

The risk outlined in the Blake Griffin scenario, whereby not showing suitable commitment now affects a player's commitment down the line, is very palpable. If Oklahoma City has indeed committed to extraspending in this future window, and not at any other, then, that strategy only works if they are able to retain the stars that backbone the entire strategy. The Thunder seemingly hope the interim years of 55-plus win seasons, internal growth and conference title competitiveness are suitably placatory. If they aren't, it might not be just Harden and Martin they lose. However, if they are, then the Thunder will retain Durant, Westbrook and Serge Ibaka in their primes with enough flexibility in their bottom line to finally pay for whatever the final piece is. It's a risk that has already hurt them, but it potentially has the greatest of rewards.

We see, then, different approaches to synonymous problems. And we cannot know what will happen. All we know in the present day is that the Thunder got slightly worse, the Bulls got very unlucky and considerably worse, while the Clippers are the best they have ever been. Given a competitive window, an operating budget, and a chance to push, the Bulls chose to go for it, the Thunder chose to save it, and the Clippers are somewhat straddling the line in between, yet to spend the money of a champion but without having lost anything basketball-wise because of it.

Who is right? We'll only know afterwards. Whichever it is, these are the reconciliations that the luxury tax demands now. And it smarts.

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