Luxury Taxes: Do They Help or Hurt the NBA?

Informative Article


Are the rules that build the big teams we remember in the NBA a mistake due to the unfairness they cause?


by Pranav Arun

Luxury taxes have become a very important aspect of the NBA, and one of the most important defining factors for powerful teams to be formed in big cities. What is a luxury tax? According to Frank Urbina writing for HoopsHype in USA Today Sports, the luxury tax is “incremental tax owners have to pay for their teams going over the salary cap”. What does this mean? Team owners with more money can go higher above the salary cap to have more superstars on their teams, such as how the Warriors, Lakers, and Bulls have done in the past. Wealthier owners are with the big-market teams from big cities, like the Chicago Bulls, Los Angeles Lakers, New York Knicks, Los Angeles Clippers, and Golden State Warriors. These teams are expensive to buy and manage, but also provide more rewards.


Bigger teams with richer owners are therefore much more favored and likely to build big contenders and pay luxury tax in exchange to win. Although this may seem extremely unfair to an outsider, bigger teams from bigger cities generally have much more fans and make much more money for the NBA. Due to these luxury taxes, these big markets are allowed to create loaded teams with multiple superstars, which equals more views and higher ratings for the NBA. However, should these financial benefits for the NBA and the teams outweigh the unfairness between teams caused by the luxury tax? This is where the trilemma can be seen.


Should the NBA keep the luxury tax due to the fame and financial benefits it provides, should they remove it because of the unbalance it causes in the NBA, or is there a neutral side?


The Supporting Side: People for Luxury Taxes


Many people view and support the luxury tax due to the benefits it gives the NBA. In general, the memorable teams, such as the Showtime Lakers, the Jordan Bulls, and the Warriors Dynasty were all made and kept together for a while due to the luxury tax effect on the NBA. This allowed players to get paid over the salary cap and held together teams due to increased financial benefits for the athletes. In addition, the teams being built by the effect of the luxury taxes are the teams that are giving the most fame to the NBA. For example, this year, fans would rather watch a team with multiple stars such as the Nets facing a worse team than watch two evenly matched teams due to the amount of entertainment that the Nets give with many stars. Although the luxury tax causes inequality between teams, this side believes that it is worth it due to the financial and fame benefits it gives, and the entertainment that memorable teams cause.


The Negating Side: People Against Luxury Taxes


Many people also believe that luxury taxes are hurting the NBA due to the inequality it creates between teams from big cities and teams from smaller locations. It is true that neutral fans and fans from big cities gain more interest in the NBA from the luxury taxes, but what effect do they have on fans from small and medium market teams? It is true that many small and medium market teams can be contenders, but luxury tax makes them at a big disadvantage for landing spots for superstars. This can result in bad teams with low star power that are not fun to watch for home fans, and big market teams could be the only teams with consistently good ratings and consistently high fan attendance. In conclusion, luxury taxes could be very hurtful to the overall fanbase of every team and the competitiveness of the NBA.


The Possible Neutral Side


As we have seen, both of these sides are well supported in this Trilemma, and they both have good reasons to back them. However, is there a neutral side that would satisfy both sides? The answer is yes. The salary cap right now for the NBA is very flexible due to the luxury tax, and that is what is causing the Trilemma. If the NBA could increase the luxury tax if the salary cap is exceeded, or decrease the flexibility of the salary cap to make the salary cap more concrete, this would allow for more interesting teams to be created and increase fairness in the NBA. In conclusion, both of these sides have valid arguments, and the neutral side in this Trilemma can clearly encompass both of the sides.