Harsh NBA Luxury-Tax Penalties Could Overshadow Extension Negotiations

Tyler Herro and the Miami Heat recently agreed to a four-year extension worth up to $130 million, making him the latest member of the 2019 NBA draft class to lock up a nine-figure deal. He joined Zion Williamson, Jay Morant and Darius Garland, all of whom inked five-year max deals back in the summer, and New York Knicks forward RJ Barrett, who agreed to a four-year deal worth up to $120 million back in early September .

Teams have until Oct. 17 to sign first-round picks from the 2019 draft class to rookie-scale extensions. If they don’t reach an agreement by then, those players will become restricted free agents next offseason.

The ongoing discussions over the league’s next collective bargaining agreement could further complicate extension negotiations, particularly for teams like the Golden State Warriors that are already deep into luxury-tax territory.

The Warriors have been particularly vocal with their dissatisfaction over the league’s current luxury-tax system this offseason, but they aren’t the only ones. In mid-September, Shams Charania of The Athletic reported that changes to the luxury tax might be one of the biggest sticking points in the next CBA.

“More punitive penalties for the luxury tax system is a point of emphasis for the league and some team governors,” Charania wrote. “Team executives believe the tax penalty will be arguably the biggest issue to resolve in the next CBA. However, changing the overall structure of the tax could be an aspect both sides address.”

The Warriors already paid out an NBA-record $170.3 million luxury-tax bill last season, and they’re currently on pace for a league-high $170.2 million tax bill this year. Add in their $189.5 million active payroll, and they’re set to pay out nearly $360 million for their roster this year.

Warriors CEO Joe Lacob told Tim Kawakami of The Athletic in July that it was “not even remotely possible” for them to spend much more than that. Thanks to the NBA’s punitive repeater tax, the Warriors will be paying upwards of $7 in luxury tax for every additional dollar they spend on their roster for the rest of the season.

“You know, we kind of blew a hole in the system, and it’s not a good look from the league’s perspective,” Lacob told Kawakami. “They don’t want to see it happen. And there are limits. I’m not going to say what they are, but there are limits to what you can do.”

That overhangs the ongoing extension negotiations between the Warriors and Jordan Poole, Andrew Wiggins and Draymond Green, all of whom either can or will become free agents next offseason. Poole will be a restricted free agent if he does not agree to an extension in the next two weeks, Wiggins will be an unrestricted free agent if he does not ink a new extension by June. 30, and the same goes for Green if he turns down his $27.6 million player option for the 2023-24 season.

Herro’s extension with Miami might serve as a new baseline for negotiations between Poole and the Warriors. Green “wants and believes he deserves a maximum contract extension from the Warriors,” according to Anthony Slater and Marcus Thompson II, which would span four years and cost $138.4 million. Wiggins isn’t likely to fetch another max contract either from the Warriors or another suitor in free agency, but he played a pivotal role in their championship run and earned himself another hefty payday.

With Stephen Curry’s four-year, $215.4 million supermax contract beginning this season and Klay Thompson owed $40-plus million in each of the next two seasons, the Warriors may be reaching a point of no return financially. There’s no salary-cap mechanism preventing them from re-signing any of these players, but their ballooning luxury-tax bill could make it prohibitively expensive to retain all three.

The uncertainty over changes to the tax system could further deter them from making any rash moves. They might prefer to see whether the repeater tax becomes even more punitive—and whether there are any team-friendly trade-offs for that sacrifice—before committing nine-figure deals to Poole, Wiggins and Green.

The Warriors aren’t the only team that needs to be mindful of potentially harsher luxury-tax penalties. Both the Boston Celtics and Phoenix Suns are already in luxury-tax territory and have extension-eligible players—Grant Williams and Cameron Johnson, respectively—who could cause their tax bills to balloon in future years.

The luxury-tax threshold is projected to jump from $150.3 million this season to $162 million next year, which could help provide some financial relief for teams. However, steeper penalties for teams far above the tax line could negate that and then some.

The league’s new national TV contracts kick in after the 2024-25 season, which should cause both the salary cap and the luxury-tax threshold to skyrocket. If teams are willing to stomach two years’ worth of financial pain, it may behoove them to lock players into multiyear deals before a potential cap spike in 2025-26.

The threat of a steeper luxury tax in the next CBA could make them think twice about doing so, though.

Unless otherwise noted, all stats via NBA.com, PBPStats, Cleaning the Glass or Basketball Reference. All salary information via Spotrac or RealGM. All odds via FanDuel Sportsbook.