Celtics' hard decisions in luxury tax battle: Hollinger from the Athletic

[ozgod]

Interesting article from John Hollinger at the Athletic. I posted it in full as it is behind a paywall of which I am a subscriber and I wanted to share it with everyone.

Hollinger: Celtics face hard decisions in offseason battle vs. the tax man

By John Hollinger Oct 8, 2020 97

Welcome to the offseason of hard decisions, Boston.

The Celtics’ biggest enemy next season isn’t Jimmy Butler, or Giannis Antetokounmpo, or even the back-in-the-East Doc Rivers.

It’s an unseen enemy that exists only on spreadsheets, yet will ultimately determine so much about the Celtics’ next two seasons: The luxury tax.

Coming off a season where the Celtics were both so close (they outscored the Heat over six games and should have won Game 1) and yet so far away (nobody thinks they would have beaten the Lakers), the Celtics are in many ways in far better shape than you might have thought 12 months ago when Al Horford left. Jayson Tatum and Jaylen Brown look like an All-Star caliber core on the wings for the next decade, two other All-Stars ride shotgun (Kemba Walker and Gordon Hayward) and rottweiler stopper Marcus Smart is under contract, too.

Unfortunately, the supporting cast isn’t there yet. The rest of Boston’s roster was good enough to get it through the regular season and the first round of the playoffs, but began showing cracks in the Toronto series and was fatally exposed against Miami. To advance further, the Celtics need to do better than the Ojeleyes, Wanamakers and Williamses that surrounded their core.

Alas, fixing that is hugely difficult because of the tax issue that looms over everything.

Normally a team comes out of a postseason defeat thinking, “What pieces can we add?” Boston’s offseason, however, is much more likely to involve the question, “What can we subtract?”

The Celtics face a $23 million luxury tax penalty as a result of being $13 million over the projected tax line, and that’s before they add a single player. That number could potentially change based on what happens with their draft picks and Enes Kanter’s player option, but there is no plausible scenario where they bring back the current roster and stay under the tax.

It’s just money and it’s not yours, so what’s the big deal? Well, it still matters to the people footing the bill. While the Celtics are perhaps the league’s most storied franchises and play in a larger market, they are not a shoot-cash-out-the-firehouse operation like Golden State or the Prokhorov-era Nets.

Boston’s owners are willing to pay the tax for a winner, like they did in their title season in 2008. In fact, the Celtics have landed in the luxury tax seven times. However, their total payments have been less than $50 million. In 2018-19, for instance, they paid just $3.9 million.

That 2018-19 payment might matter, however. If one presumes the Celtics can’t escape the tax in 2020-21 and might not in 2021-22 either, it means they’ll be subject to a repeater penalty in 2022-23 … right when Smart hits free agency and a 32-year-old Walker makes $37.6 million.

It’s a First World problem, the biggest issue facing a team that is trying to go from “steadily really good” to “championship caliber.” But it also stands as a massive impediment. How can they work around it over the next two seasons?

The landscape
Before we get too deep into the weeds, let’s start with the big picture. The luxury tax for next season is likely to be at or around the 2019-20 level of $132.6 million. Nobody knows the exact amount for sure since it has to be negotiated between the league and the Players’ Association in the coming weeks, but every league exec I’ve spoken with has set this number as the rough expectation.

The Celtics will have $120.5 million committed to six players who will almost certainly be on their team next year — $34.4 million to Walker, $34.2 million to Hayward, $23.7 million to Brown (this could vary slightly due to incentives), $13.4 million to Smart, $9.9 million to Tatum, and $5 million to Daniel Theis.

So if they could just play the entire season with six players, they’d be fine. (Celtics fans will immediately joke: “Why not, we did it last year?”)

However, filling out the rest of the roster takes Boston way over the tax line. Romeo Langford will make $3.6 million, Grant Williams will make $2.5 million, Vincent Poirier $2.6 million, Robert Williams $2.0 million and Carsen Edwards $1.5 million.

Additionally, Kanter has a player option worth $5.0 million that he’s likely to pick up. Finally, Boston’s three first-round picks will have cap numbers at $3.5 million, $2.0 million and $1.3 million, respectively, if the Celtics use all three picks.

Add all that up and the Celtics have 15 players on their team taking up $146 million in salary. That’s before considering picking up up a $1.75 million player option on Semi Ojeleye, a $1.5 million non-guaranteed salary on Javonte Green or attempting to re-sign free agent Brad Wanamaker.

That’s also before they attempt to do anything to, you know, improve the roster from a year ago. Ideally, the Celtics would use their $5.7 million taxpayer mid-level exception on either a backup point guard or a real power forward.

Obviously, something’s gotta give. They can’t field a 20-man roster, for starters, and they’re unlikely to spend gazillions into the tax based on their history.

The 2021-22 conundrum
The other constraint on crazy spending this summer is the double threat of the repeater tax and the 2021-22 payroll. Boston will have Hayward’s huge contract coming off the books in the summer of 2021, but its salary book will barely notice because Tatum’s presumed max contract extension will begin at the same time.

The cap is likely to rise in the 2021-22 offseason, although we’re operating without a map here — there’s just a lot of uncertainty about the future cap right now, and that impacts Boston’s planning. Since Tatum will be supermax eligible for 30% of the cap, however, only two-thirds of any salary-cap increase would be likely to end up in Boston’s favor. Add it all up and dropping $34 million off their books in Hayward would almost immediately be offset by adding $20-22 million with Tatum’s new salary.

Additionally, Theis and Hayward will be free agents, and the Celtics will only have perhaps $30 million below the tax line to fill out the final 10 roster spots around the core of Tatum, Brown, Walker and Smart. Boston could potentially go into the tax again, but the repeater looms, and their roster likely only will get more expensive in 2022-23.

The Hayward play
One option Celtics fans bring up is having Hayward opt-out of his 2020-21 contract and then agree to sign a longer extension at lower annual dollars. For instance, if he declined the salary and signed a four-year, $80 million contract instead, wouldn’t that make the Celtics’ life easier?

It’s not clear to me whether this would be desirable for Hayward or not — it is essentially the same as playing out next season and then signing a three-year, $45 million deal. I’d ballpark that as his current value (particularly if he’s able to destroy all copies of the tape from Game 6 of the Eastern Conference finals), but he could argue that he’d exceed it by quite a bit with a good year. On the other hand, he’d likely have to find a new team at that point.

But is it even desirable for Boston? A deal such as this for Hayward would save Boston about $15 million from its current-season luxury tax bill, which might be particularly useful if it allows the Celtics to get all the way under the tax line. The problem is they have to get all the way under, because they’re adding a $20 million hit in 2021-22 and 2022-23 when they already have potential tax issues. Adding a $20 million hit with a repeater penalty is unthinkable. And if his extension puts them over the tax in 2021-22, it probably also does in 2022-23, and maybe even 2023-24. Yikes.

Finally, a Hayward deal like this would actually allow the Celtics to limbo just under the 2020-21 tax line, but only in such a way that makes it virtually impossible to add to their team in the offseason. Isn’t their best chance at winning big with the team they have right now? Why starve it just to maybe manage a future cap situation, and not even manage it that well? I just don’t see this as a great option.

Kanter and the picks
The Celtics’ other opportunity to improve their cap position revolves around Kanter and their three first-round picks (14, 26, and 30). This is where unsexy words like “flexibility” and “future options” come heavily into play. In fact, these are the key to Boston’s offseason.

With a team in win-now mode that already had four rookies and a second-year player on the roster, adding three more rookies seems sub-optimal. Even if the cap weren’t an issue, Boston would likely be looking to deal on draft night.

(I should note that the Celtics could also draft an overseas player with one or more of their picks and leave him to develop overseas, although only one or two players this year fit the profile of playing overseas and being worthy of a first-round pick.)

Given Kanter’s limited role, the tax implications and the fact that two of Boston’s best young players play the same position, it doesn’t seem like keeping him is desirable. Alas, odds are he opts into his $5 million salary next season — any student of the big-man market could tell you he’s unlikely to match that number this coming offseason. Kanter is unlikely to have trade value at that price either.

Thus, a great option would be to pay a team to take Kanter and Poirier (who rarely played and looked overmatched when he did) by dangling one of Boston’s first-round picks.

Unfortunately, Kanter doesn’t have to inform the Celtics of his intention until two days after the draft. They can only hope that he informs them early enough to allow them to set up a trade on draft night. This, obviously, would be aided by the Celtics working with his agent to send him someplace where he’s likely to play.

There are two ways to do this. The simplest is by trading Kanter, Poirier and the 30th pick to a rebuilding team that needs a center (coughCharlottecough) and receiving a second-round pick in return (just giving up a first would be pretty expensive for this level of salary dump). That deal would save $9 million and open up three roster spots.

Trading for a big?
A better but riskier path might be an all-in-one type arrangement, where they trade the 14th pick, Kanter and Poirier, and get back a legitimate frontcourt player in return. The most obvious target for such a deal would be Cleveland’s Larry Nance, who could play 4 and 5 for them and who makes $11.7 million, $10.7 million and $9.7 million over the next three seasons. That declining salary number is important, as it likely enables Boston to survive juuuuust below the 2021-22 tax line if it wishes. Plus, this also gives the Celtics enough frontcourt power that they won’t feel too skittish about turning the center spot over to Robert Williams and Grant Williams when Theis’s contract runs out.

The problem is that this gets expensive: Make this trade and re-sign Wanamaker, and you’re cutting a check to the league for nearly $30 million in tax payments, above and beyond the salaries. Make it and use the taxpayer MLE to upgrade Wanamaker’s slot, and you’re pushing $40 million. They might be able to cut that tab with some in-season window dressing – particularly by trading one or two of their younger players after another half-season of evaluation – but it’s pricey.

The Celtics are already in a position where they don’t have a ton of flexibility with their financial situation, due to four max or near-max contracts on the books once Tatum extends. Trading into even less flexibility seems suboptimal, even if the adrenaline rush of acquiring Nance seems pretty sweet.

The best path forward
Ultimately, it seems like Boston’s best strategy is to subtract first and deal with additions later. Everyone gets fired up about free agency fixes and offseason mega-trades, but playoff rosters aren’t due for another nine months or so. Boston has half a season before the next trade deadline to track the progress of its young players, assess its options and make the correct additions if needed. With players like Robert Williams and Langford in particular, that time will be valuable.

Yes, there is an undercurrent of urgency: The Celtics are a title contender right now; but between free agency, the state of the Eastern Conference, and Walker’s knees, a lot of water can still go under the bridge between now and the summer of 2022.

But the first task is keeping as many options open as possible. Even the Hayward opt-out, tempting as it might be in the short-term, could end up handcuffing the Celtics to an expensive perimeter group that proved to be too small when it played as a five-man unit against Miami.

Meanwhile, Boston also has small tricks it can use to lower the burden this year and open roster spots and money for some veteran help:

• Drafting an overseas player such as FC Barcelona’s Leandro Bolmaro with the 26th pick cuts both money and a roster spot.
• So would trading the 14th pick for a first in 2021 or 2022 – which would also leave the pick in Boston’s holster to use for a midseason trade.
• The Celtics also can also obtain a second-round pick and pay that player the rookie minimum of roughly $900,000, which is barely half the veteran’s minimum. Those savings are magnified by the luxury tax multiplier.
• Finally, Boston can keep the roster at 14 players until the final day of the season, and actually go below that number for parts of it. That would entail filling the last roster with a non-guaranteed deal, waiving that player before contracts become guaranteed, and juggling 10-day contracts for the rest of the season.

However, all those maneuvers require clearing roster spots in the first place, which is why moving on from Kanter and Poirier and not using all three first-round picks is so important. They would also have to waive Green and decline Ojeleye’s option.

The most humble version of all this involves NOT making a trade for another salary, at least not yet, and instead trading Kanter, Poirier and the 30th pick for a second-round pick, drafting Bolmaro at 26 and leaving him in Spain, and trading the 14th pick for a 2021 first.

Boston’s lone spend would be using it’s $5.7 million taxpayer exception on a combo guard. Otherwise, the Celtics are counting on Langford and the two Williamses to develop into stronger rotation options, and riding with that group to the trade deadline.

Doing so would still leave Boston in the tax, but to the tune of just $10 million or so, leaving it a manageable $16 million payment to the league and keeping the books clean in the out years. This strategy also gives Boston maximal flexibility heading into the trade deadline because it preserves the trade value of the 14th pick.

Only then would the Celtics potentially strike, having much more information about both the state of their young players and the direction of future salary cap numbers.

No, it’s not as fun as creating trades for Bradley Beal, but it might be the most realistic approach to an important offseason in Boston. While the Celtics need to continue hunting for one or two more high-level players to complement their impressive core of wings, they don’t need that player to arrive tomorrow. In the short term, the dull business of managing their luxury tax and future cap is what can enable the Celtics to eventually strike from a position of strength.

John Hollinger’s two decades of NBA experience include seven seasons as the Memphis Grizzlies’ Vice President of Basketball Operations and media stints at ESPN.com and SI.com. A pioneer in basketball analytics, he invented several advanced metrics — most notably, the PER standard. He also authored four editions of “Pro Basketball Forecast.” In 2018 he was honored with the Lifetime Achievement Award at the Sloan Sports Analytics Conference. Follow John on Twitter @johnhollinger.

https://theathletic.com/2124957/2020/10/08/hollinger-the-celtics-face-hard-decisions-in-offseason-battle-vs-the-tax-man/

[NKY fan]

I’m not sure it’s 100% lawful to post the entire content of the pay wall article on a free media like Celtic strong.
With that all of these have been discussed over and over on this forum. I won’t be surprised if some intern for Hollinger compiled 3-4 threads from this site and made an article with all those different bullet points.

[CFAN38]

A lot to take in there and all stuff that Hollinger mentioned on his podcast.

For one DA already came out and told media that the team is willing to pay luxury tax this year so that helps.

Another interesting idea that I don’t necessarily agree with but can see the logic for is the trading of the 14 for a future all be it likely lower 1st and acquiring an additional 2nd in order to keep cost down. With this draft making a trade down from 14 to the 31-35 range isn’t a major talent drop (depending on how the lottery goes). If a team in that 31-35 range is willing to make a 14+Kanter+Porier for a future top 10 protected and this years early 2nd it could make sense for the Cs.

 Looking at most mocks picks 26/30/35 could net the Celtics Terry/Bane/Tillman that would be a very productive draft yielding both high upside talent and NBA ready role players. Even if Terry is off the board guards like Riller, Flynn, Prichard or Quickley.

[ozgod]

I’m not sure it’s 100% lawful to post the entire content of the pay wall article on a free media like Celtic strong.
With that all of these have been discussed over and over on this forum. I won’t be surprised if some intern for Hollinger compiled 3-4 threads from this site and made an article with all those different bullet points.

I have a subscription and and am providing a link back to the original source. If they, or the CelticsStrong staff, tell me to take it down I'll be more than happy to.

[cman88]

if your goal is a championship you have to pay the luxury tax. If that is what ownership is worrying about then clearly a championship is not the #1 goal.

[GreenlyGreeny]

Trade Jaylen, Langford, all of our picks this year and our 2022 pick and 2024 pick for Giannis on his supermax. Win titles 18-22 over the next 5-8 years with the Giannis/Tatum/Smart Big 3, in the process raking in far more revenue than GS during their recent dynasty, and the tax suddenly does not matter because you’re a dynasty rolling in record-breaking revenue with your cheerful superstars Giannis/Tatum that are loved throughout every corner of America and the rest of the world. It’s the no-brainer marriage for Giannis and the Celtics, much like AD and the Lakers last year. The NBA would love it because it’s the perfect contrast to Hollywood LeBron and AD.

Or stick on this treadmill and be lucky to break even after all of the taxes...anybody who thinks Jaylen, Langford and those picks are going to amount to more than Giannis is just being absurd. Strike now, do the backdoor shenanigans just like the Lakers did with AD, and get Giannis to force the Bucks’ hand.

[NKY fan]

if your goal is a championship you have to pay the luxury tax. If that is what ownership is worrying about then clearly a championship is not the #1 goal.

TP! Ownership and Danny already set records for making 1rd draft picks. Time to switch gears and prioritize contending

[NKY fan]

What hollinger doesn’t mention is all these seasons that we were barely above the salary floor. Owners should have built up their rainy day fund. More than enough to pay luxury taxes for a few years.

[footey]

Hollinger gave a very sobering blue print of what we can expect Danny to use going forward.

Wyc is no dummy. If he doesn’t think our team is likely to win these next 2-3 years, he is not going to throw luxury tax money to the other owners.

Sounds like our best option is to make cuts and defer making picks.

Don’t be surprised if we trade 14 for a protected 1st in next year’s draft. Bummer. 

[DefenseWinsChamps]

if your goal is a championship you have to pay the luxury tax. If that is what ownership is worrying about then clearly a championship is not the #1 goal.

False dilemma. You also want to be sure that you have a championship-caliber team when you commit to the luxury tax, otherwise you've limited and hurt your flexible to improve your team.

[BitterJim]

What hollinger doesn’t mention is all these seasons that we were barely above the salary floor. Owners should have built up their rainy day fund. More than enough to pay luxury taxes for a few years.

What years were those? We've dipped below the cap during a couple of offseasons, but we haven't been anywhere near the salary floor in Ainge's entire tenure (and he dipped below for the first time when we signed Horford in 2016, hence all of the old holds we had to renounce). 2016-17 was the only time we finished a season under the cap, and that was by a whopping $1.1 million (still keeping us well over $8 million above the floor)

[tazzmaniac]

What hollinger doesn’t mention is all these seasons that we were barely above the salary floor. Owners should have built up their rainy day fund. More than enough to pay luxury taxes for a few years.

What years were those? We've dipped below the cap during a couple of offseasons, but we haven't been anywhere near the salary floor in Ainge's entire tenure (and he dipped below for the first time when we signed Horford in 2016, hence all of the old holds we had to renounce). 2016-17 was the only time we finished a season under the cap, and that was by a whopping $1.1 million (still keeping us well over $8 million above the floor)

And the owners are losing significant money this season and I expect they will next season as well. 

[Moranis]

This is why I was harping so much on getting below the tax in 18-19.  The repeater tax is the killer and there was absolutely no reason Boston should have been paying the tax that year.  That is why Ainge standing firm at the deadline with a team that he should have known wasn't good enough to get by Milwaukee or Toronto (and maybe Philly), shouldn't have been standing firm especially when it was paying the tax.  At a minimum, Ainge should have dumped Morris (or Baynes) and gotten below the tax.  It was a grave mistake at the time and it is going to be compounded going forward.   

[Roy H.]

The team is extremely profitable, they own a 20% stake in CSNNE (or whatever it’s called now) and the team has appreciated from $360 million to $3.1 billion.

The idea that they can’t afford the tax is ludicrous. 

[NKY fan]

What hollinger doesn’t mention is all these seasons that we were barely above the salary floor. Owners should have built up their rainy day fund. More than enough to pay luxury taxes for a few years.

What years were those? We've dipped below the cap during a couple of offseasons, but we haven't been anywhere near the salary floor in Ainge's entire tenure (and he dipped below for the first time when we signed Horford in 2016, hence all of the old holds we had to renounce). 2016-17 was the only time we finished a season under the cap, and that was by a whopping $1.1 million (still keeping us well over $8 million above the floor)

For a team that consistently plays 15+ playoff games we have been outside top 10/ top 20 in payroll more often than not. Ok they were above the floor by 7-10 mill in 6 of the last 8 seasons but you get the idea. Money should not be an issue for them in the next 5-6 years. If it is they have been mismanaged financially.
Also do you really want to turn into OKC failure to launch? They gave away harden for peanuts because of 5-6 extra million dollars to get him to his 4 yr max extension was too much... Cuban dismantled his championship team in 2012 because he was afraid of some mere $2-3 mill a year in luxury tax.
I would say Celtics should be ok with up to $50 mill a year ( if not more) in tax payments if they are making finals runs