MIAMI — The looming threat of the luxury tax has seemed to handcuff the Heat so far this offseason.
Paying an expensive tax bill on top of player salaries for a roster that’s not considered a title contender is something NBA teams want to stay away from. And that’s the exact situation the Heat are trying to avoid.
Miami has 11 players under contract for 2018-19 who are due about $120 million. That puts the Heat way above the $101.9 million salary cap and very close to the $123.7 million luxury tax line.
With just about $4 million separating the Heat from crossing the tax threshold, Miami has made just one move since free agency began July 1 (signing Derrick Jones Jr. to a standard NBA contract). The Heat have yet to reach an agreement with free agent Wayne Ellington, and free agents Dwyane Wade and Udonis Haslem are both still deciding whether to retire or return for a 16th NBA season.
Miami would like to find a way to re-sign Ellington, Wade and Haslem this summer, but it’s going to take some salary-cap maneuvering to avoid an expensive luxury tax bill.
What exactly is this tax that’s played such a big role in the Heat’s offseason?
The luxury tax is designed to help control team spending and it is paid by teams that exceed a predetermined threshold, which is $123.7 million this year. These teams pay a penalty for each dollar their team salary exceeds this line.
For every dollar teams exceed the $123.7 million threshold up to $4,999,999, they pay a tax rate of $1.50. From $5 million to $9,999,999 over, they pay a tax rate of $1.75. From $10 million to $14,999,999 over, they pay a tax rate of $2.50. From $15 million to $19,999,999 over, they pay a tax rate of $3.25. And for anything $20 million or more over, they pay a tax rate of $3.75 and it increases by $.50 for each additional $5 million in team salary.
Then there’s a repeater tax for, you guessed it, repeat offenders. This is an even more punitive mechanism with higher tax rates for each dollar a team salary exceeds the luxury tax line, and this applies to teams that are being taxed that particular season and have also paid the luxury tax in at least three of the previous four seasons. This does not apply to the Heat this year since they haven’t paid the tax since the 2013-14 season.
The luxury tax is not a hard cap, as it doesn’t prevent teams from spending money. But it is meant to make high-priced teams even more expensive to keep together.
Do the Heat want to fall into this “tax team” category? Obviously, they would rather avoid it. And if they do cross the threshold, they probably don’t want it to be by a big amount.
What would re-signing Ellington, Wade and Haslem mean for the Heat financially if the rest of the team remains intact? Bringing back Ellington (a max starting salary of $10.9 million), Haslem ($2.4 million minimum) and Wade ($5.3 million exception) could cost the Heat $18 million in combined 2018-19 salaries, which would put them about $14 million above the tax line if other salary can’t be shed. That would leave the Heat with a luxury tax bill of at least $26 million on top of their salaries if the rest of the team remains the same.
It’s important to note that NBA teams have until the end of the regular season to find a way to get under the tax line before they receive the bill. But it’s one thing to shave off a few million dollars to get back under the threshold in the middle of the season, and it’s a totally different (and more difficult) task to have to shed $14 million in salaries to avoid it.
So one of two things will probably have to happen if Wade and Haslem decide to return: Either the Heat will have to let Ellington sign with another team in free agency (because Wade and Haslem will be back on the roster if they choose to) or the Heat will have to shed salary through a trade or multiple trades to make room for all three.
The teams that finished this past season in the luxury tax were the Cavaliers, Warriors, Thunder and Wizards. The Heat finished as a luxury tax team in three of the four seasons that made up the Big Three Era with LeBron James, Chris Bosh and Wade — 2011-12, 2012-13 and 2013-14 — but that team made it worth it by making the NBA Finals in each of those seasons and winning the championship in two of those seasons.
Paying the luxury tax for a Heat roster that’s not considered a title contender? That’s the question in front of the organization right now.