The NBA’s luxury tax rules are not well known even among some ardent basketball fans. In this space, we attempt to explain them and how they will affect Giannis’s future in Milwaukee.

The NBA implemented luxury tax rules to deter teams from spending over their salary cap. This rule was first implemented by the league in the 2002-03 season. It was further strengthened in the 2011 CBA. The tightened regulations were quite successful in preserving competitive balance in the league.

What is the NBA luxury tax?

The NBA has a soft salary cap, meaning that teams can choose to spend over the set salary cap in order to sign players. But to do so, teams have to pay extra money on top of their wage bill to the league. This money gets redistributed to the franchises under the tax threshold.

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The luxury tax kicks in when a team spends about 33% over the salary cap for the season in question. If the team spends below the luxury tax threshold, it does not pay any additional tax for its roster and is able to avail a full mid-level cap exception to spend on 1 signing. Teams that are over the tax threshold get reduced wiggle room on their mid-level exception.

There are various tax thresholds according to which teams are slated to pay the luxury tax. For a dollar amount below $5 million exceeding the tax threshold, they are supposed to pay 150% of that amount as luxury tax.

This rises to 175% for a spending $5-10 million above the threshold. The next slabs are 250% for $10-15 million, 325% for $15-20 million and 425% for amounts $20 million over the tax threshold.

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There also exists a repeaters tax for teams that enter the luxury tax territory for 2 seasons in a row, or for 3 seasons out of 4. The repeater’s tax slabs are much steeper, at 250% for a dollar amount between $0-5 million, 275% for $5-10 million, 350% for $10-15 million, 425% for $15-20 million and 525% for over $20 million.

Teams like the Cavaliers from 2015-2018, Warriors from 2016-2019 and the 2013-14 Brooklyn Nets have paid exhorbitant luxury tax amounts in the past.

How will Bucks and Giannis be affected by the luxury tax?

The Bucks have already committed $130 million in salaries to 13 players for the 2020-21 season. This exceeds the predicted cap amount of $115 million by around $15 million.

They will enter luxury tax territory if their wage bill exceeds $153.5 million. How exactly the Bucks plan to recruit free agents or trade for stars to support Giannis this offseason remains unclear.

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