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How the proposed CBA affects the Celtics: Luxury tax

11.28.11 at 7:23 pm ET

While we wait for the players and owners to ratify a new collective bargaining agreement, we’€™ll be taking a look at how various parts of the proposal could affect the Celtics. If you’€™d like to check out the full proposal, SI’€™s Sam Amick obtained a copy and posted it here.

Part I: Free agency

Today’s topic: The Luxury Tax

Before your eyes glaze over, the luxury tax elements are perhaps the most important details of the proposed collective bargaining agreement. The new luxury tax proposal doesn’t quite function as a hard cap, but it’s not far off. This will likely have a profound effect on teams like the Celtics who have been over the tax line since they acquired Kevin Garnett and Ray Allen before the 2007 season for both basketball and financial reasons.

We covered the different rules on signing free agents via cap exceptions, but here’s a reminder:

  • Non-Taxpayer Mid-Level Exception: Set at $5M in years 1 and 2, growing 3% annually thereafter; maximum contract length of 4 years; can be used every year.
  • Taxpayer Mid-Level Exception: Set at $3M in year 1, growing 3% annually thereafter; maximum contract length of 3 years; can be used every year.
  • Bi-Annual Exception can only be used by non-taxpayers. Amount set at $1.9M in year 1, growing 3% annually thereafter. Exception cannot be used in 2 consecutive years and has maximum contract length of 2 years (same as under 2005 CBA)

In other words, teams that go over the luxury tax threshold will have fewer exceptions to utilize in free agency. While the cap and tax levels have yet to be set, they won’t go below what they were in the first two years of the deal — roughly $58 million for the cap and $70 million for the tax threshold.

In the first two years of the deal the tax will remain a dollar for dollar penalty, just as it was previously. But in the third year, things will get prohibitively more expensive:

  • Tax up to $5 million above the threshold: $1.50
  • $5-10 million: $1.75
  • $10-15 million: $2.50
  • $15-20 million: $3.25
  • Higher: An additional .50 per $5 million.

The Celtics were about $6 million over the tax threshold last season. Under the new rules, their bill would rise to more than $9 million. A more extreme example is the Lakers whose tax bill would rise from roughly $20-45 million under the new rules.

The upshot is that teams will have to think twice about spending beyond the tax level, but this may not be a bad thing for the Celtics. They have six players under contract for about $64 million and a qualifying offer of $5.9 million for restricted free agent Jeff Green. After first round pick JaJuan Johnson signs his rookie contract, they will be right up against the tax line but remember that the tax penalty stays the same for the next two years.

If the roster stays relatively unchanged this season with no more long-term contracts, the Celtics will only have about $30 million in committed salaries for 2012. That’s not only a lot of cap room, it’s also a chance for Danny Ainge to rebuild the roster with an eye on staying under the tax threshold in a more restrictive player market. There’s opportunity to rebuild without having to dump contracts for financial reasons.

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