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Salary Cap: The Economics of Basketball Superstardom | David Sun

Salary Cap: The Economics of Basketball Superstardom

by: David Sun

Competition. Nil satis nisi optimum. “Nothing but the best is good enough.”

This Latin term, competere, has occupied a clear importance in sports, dating back to the first Olympic Games in 776 BCE. Since the nascence of professional sports, fair competition has been critical in keeping athletics riveting. Leagues such as the National Basketball Association implement underlying restrictions and limitations to keep the exquisite orchestration of professional basketball riveting and cutthroat, known as the salary cap. Recently, the Golden State Warriors reinvigorated the debate surrounding competition due to their acquisitions of multiple superstars and domination of the league. In such an age of competere, it’s crucial to understand the economics of basketball competition: the unrevealed frame of the NBA wage limit that runs the show from behind the scenes.

In sports, a salary cap is a form of restriction on teams that limit how much money they are allowed to spend. This limit maintains fair competition, limiting wealthier teams like the Los Angeles Lakers from skewing talent and accumulating superstars. The NBA implements a soft cap, a limit that can be exceeded in particular exceptions with restrictions and consequences, along with a luxury tax system that punishes teams that exceed it, making it virtually impossible to exceed the limit by too wide of a margin. The luxury tax, a certain proportion of money that teams are required to pay, occurs when teams exceed the tax line, which is slightly above the soft cap. For the 2017-2018 NBA season, the soft cap dictated a limit of $99 million, with the tax line at $119 million.

The amount of luxury tax owed is in clear juxtaposition to the amount over the tax line. The more you surpass the tax line, the higher the luxury tax. For example, if a team spends less than $5 million more than the tax line, then they pay $1.5 for every dollar exceeded: spending $3 million more than the salary cap dictates an obligation to pay $4.5 million in luxury tax. If a team spends more than $20 million more than the tax line, then they pay $37.5 for every dollar exceeded, which means a $25 million surplus would translate to $93.75 million in luxury tax.

The salary cap itself has its own restrictions as well. Once the cap limit is reached, teams are not allowed to sign free agents or trade for players that would cause them to exceed their salary cap. Nevertheless, teams can harness certain exceptions to allow them to spend more than the salary cap.

The minimum salary exception comes into play when a team is required to complete their 14-man roster. If a team spends its $99 million soft cap on just five players, then the minimum salary exception allows them to sign extra free agents on minimum salary deals and for a contract no longer than two years.

The Larry Bird exception, named after the Boston Celtic legend, allows teams to resign the players on their current roster and exceed the salary cap. The team has the “bird” rights to a certain player, which includes qualifications on players that are eligible to be kept over the soft cap.

The mid-level exception (MLE) is a relatively small amount of money that teams are allowed to use to sign players, regardless of the cap restrictions. In the 2017-2018 NBA season, the mid-level exception was $8.4 million. The MLE varies per team, with non–tax-line teams receiving a higher MLE than tax-line teams. The New Orleans Pelicans, as a non–tax-paying team, received $8.4 million, while the Oklahoma City Thunder, as a tax-paying team, received $2.2 million. While there are more exceptions that teams can use to exceed the salary cap, the three listed are the most common.

Underneath the glamour and spotlights of talent, skill, and competition, the economics of the National Basketball Association, specifically the utilization of the salary cap, quietly power the flamboyant engine that professional basketball thrives upon. The importance of an economic foundation to strengthen fair competition ensures that, though the Warriors may be champions (for now), the league is sure to stay competitive and captivating for years to come.

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