Original Danny Leroux: Rockets’ Repeater Tax fear more excuse than reality article

By Danny Leroux Feb 10, 2019

It certainly appears that Houston Rockets owner Tilman Fertitta is deeply afraid of the repeater tax. After all, he said so himself back in September.



That “horrible hindrance” is a real thing in the Collective Bargaining Agreement and is what some have used to explain or even justify the cost-cutting moves general manager Daryl Morey has made since the Rockets lost Game 7 of the 2018 Western Conference Finals, including their transactions at the trade deadline.

That framing is incorrect.

Instead, Houston’s actions were more about reducing or eliminating the chance that the Rockets pay the luxury tax at all rather than narrowly dodging the looming specter of the dreaded repeater tax down the line.

The Repeater Tax

The repeater tax has a substantial effect on a team’s finances but requires a very narrow and rare set of circumstances. When triggered, it forces a franchise to pay an additional dollar for every dollar it is over the tax line, adding another cost on top of the normal luxury tax system. For example, the repeater tax will increase Oklahoma City’s player cost by more than $20 million on top of the $46+ million in tax it would have paid as a non-repeater. Even before they finish filling out their roster this season, the Thunder will spend over $210 million on players: $144 million in salary, $46 million in non-repeater luxury tax and $20 million in repeater tax. That is a ton of money.

However, the repeater tax is more often an excuse or even scapegoat than actual hindrance. In order to pay that extra money, a team has to have already paid the tax in at least three of the previous four seasons and then be over the line again for the season in question. The Golden State Warriors first paid the tax in the 2015-16 campaign and will not become a repeater until next season, a full four years after their first bill. Oklahoma City this season will be only the third time the repeater tax has been paid since it kicked in for the 2014-15 season.

Fertitta can be genuinely scared of the repeater tax and use it as a rationale either in reality or rhetoric but there was never a credible reason to fear actually paying it during this era. The last time Houston paid the tax was the same 2015-16 season when the Warriors started, but the Rockets were under the threshold in both 2016-17 and 2017-18, making this the first of that potential four- or five-season cycle rather than the third or fourth. That means that the absolute earliest the Rockets could have become a repeater team was 2021-22 if, and only if, they paid the tax in each of the three preceding seasons and then again in 2021-22, which happens to be when Chris Paul decides on his $44.2 million player option. Ducking it even by a dollar even once in that four-season timeline would push them beyond Paul’s contract and possibly even James Harden’s.

It is also worthwhile to go through the Rockets’ salary structure year-by-year to explain the significance of their deadline moves and why the repeater tax was never going to affect them:

 

The 2018-19 season

Over the summer, Morey negotiated long-term contracts with Paul and Clint Capela that combined with Harden’s Designated Veteran extension to solidify the Rockets’ next few years of spending. While Paul’s four-year, $159.7 million deal may prove challenging later on, securing Capela’s services on a five-year, $87.5 million agreement helped create the wiggle room for their deadline moves.

Retaining Paul and Capela was the top priority but those two ended up being the team’s only significant new expenditures as both Trevor Ariza and Luc Richard Mbah a Moute signed elsewhere on one-year contracts. Morey also sent Ryan Anderson and intriguing second-round pick De’Anthony Melton to Phoenix for Marquese Chriss and Brandon Knight in a move that lowered their team salary by more than $3 million.

Houston ended up not signing anyone for more than the minimum, retaining most of their Mid-Level exception but also keeping their payroll low enough to make subsequent moves. Using cash to dump disastrous minimum signings Carmelo Anthony and Michael Carter-Williams cleared their full salaries off the luxury tax calculations, then trading Knight and Chriss along with a first-round pick as sweetener set the table. On deadline day, Morey shipped James Ennis to Philadelphia for a second-round pick swap and sent a second to Indiana so it would take on the final extraneous money, moves that put the Rockets all the way under the tax threshold for this season.

It is possible that Morey uses the remaining pro-rated MLE to push back over the tax, but it also took one first and three seconds (Melton, 2020 and 2021) to get there in moves that would have been largely unnecessary if they intended to pay the tax this season. Furthermore, there is the opportunity cost of using those picks in this manner, especially since the front office could have utilized their 2019 first-round pick to improve its talent rather than save the owner money with a different direction from the top. Their priorities become clearer when looking forward but not in a way that is particularly favorable to Fertitta’s public rationale.

 

The 2019-20 season

Before trading Knight, Chriss and a first-round pick to Cleveland the day before the deadline, Houston had three players outside of Harden, Paul and Capela on significant multi-year contracts: Eric Gordon, P.J. Tucker and Knight. None of those salaries are as large as the big money trio but their combined obligation for 2019-20 was about $38 million, enough to put the team in the luxury tax. Since Gordon and Tucker are both important parts of what the Rockets do well, Knight made sense as the player to go, though he carries the most baggage as the weakest player on a massive contract. After all, that is why he was a part of the Suns/Rockets deal in the first place.

After Wednesday’s trade, Houston has commitments worth $115.1 million to Harden, Paul, Capela, Gordon and Tucker for the 2019-20 season. With a projected luxury tax threshold of $132 million, that leaves only $16.9 million for everyone else. That is not too much per player when filling out the other seven roster spots but even with Nene’s $3.8 million player option, retaining 2018 additions Isaiah Hartenstein and Gary Clark on the team and filling up to 13 roster spots with veteran’s minimum players, the Rockets would have a few million in wiggle room under the tax.

It would not be quite enough for the projected $5.7 million Taxpayer Mid-Level exception, much less the more robust $9.2 million Non-Taxpayer MLE, but that flexibility still enables the team to add talent either in July or on the buyout market. Offloading Ennis on Thursday arguably mitigates some financial risk for that season, though I would argue his player option at the minimum would have been team-friendly or at least tradable if picked up, despite a somewhat disappointing season.

Moving Nene would open up additional spending power and should be possible depending on how potential trade partners feel about the 36-year old’s viability as a backup center, plus any cash or assets Morey is willing to include as enticement. Additionally, we already saw a template this season for how the Rockets can get ill-fated small contracts off their books to avoid having them count at all for the tax — a tactic that should be emulated around the league by teams in similar situations.

As such, it is fair to assume that the Rockets can stay below the luxury tax next year should they choose to. There are many potential motivations for going over, including the right player committing for their MLE, but the financial shift that happened this season feels predictive.

 

The 2020-21 season and beyond

The Rockets stand out among competitive teams because they do not have any clear-cut players on roster who are in line to get substantial pay raises now that Capela is off his rookie scale deal. That means each passing season has both the per-season bumps for their holdover players and an increase in the salary cap. From 2019-20 to 2020-21, the current projections have the cap rising $9 million and the Harden/Paul/Capela trio making an extra $7 million, so the two shifts almost offset. Since Gordon’s contract expires in 2020 and Tucker’s is either $8 million to stay on the team or $2.6 million to play elsewhere, Houston’s books get cleaner unless Gordon returns at a higher salary, which appears unlikely at this moment since it will be his age-32 season. July 2020 will also be when Nene comes off the books if he has not been moved before then.

It is far too early to break it down beyond a single number but a preliminary look gives Houston about $35 million to spend on everyone outside of Harden, Paul, Capela and Tucker at his full contract value. That $35 million would need to cover holdovers like Gordon, their 2020 first-round pick, MLE and any players Morey signs this offseason to multi-year contracts, which opens up another fascinating wrinkle of the Knight move.

Since the Rockets look to have meaningfully more flexibility in 2020-21, they could theoretically offer a more significant contract for two or more seasons with their 2019-20 MLE, which may attract a superior talent. It is entirely possible that the best players would prefer to get back out on the market in a remarkably weak 2020 free-agent class but that ability to offer something longer may help.

As such, it should be abundantly clear that even with Knight on their books, Houston’s set salaries and lack of imminent, significant pay raises made it exceedingly unlikely it would be over the tax in 2020-21, much less 2021-22, which was the earliest possible year they could be a repeater. That rationale became even more strained when the Rockets moved under the tax for this season, as that pushes back going into the repeater until after Paul is off the books entirely, even before the savings in future years made them a significantly less likely tax team between now and then.

That means the Rockets’ personnel decisions since the ownership change have a more simple and straight-forward explanation: rather than fearing a repeater tax bill that was never going to come, management prioritized fiscal responsibility, often at the expense of team quality. It is possible, if not probable, that Houston was not going to reclaim its place as a top-tier championship contender this year even if it spent significantly more money. While ownership can set directives and priorities as it sees fit, that is an entirely different justification than deftly avoiding the dreaded repeater tax.

https://theathletic.com/810477/2019/02/10/leroux-rockets-repeater-tax-fear-more-excuse-than-reality/

 

Old Red 94 podcast trade deadline podcast that also talked about the trade deadline and tillman's luxury tax fears..