What will the salary cap, luxury tax threshold, and mid-level exception be in 05-06 and 06-07?

By Dan T. Rosenbaum

Every year during July it is a big mystery where the salary cap is going to be set. Now, according to reports about the new collective bargaining agreement (CBA), we will add to that mystery by having the luxury tax threshold also being set at this time.

Under the rules in the previous CBA, along with the reported changes in the new CBA, here are my predictions of the salary cap, luxury tax threshold, and mid-level exception over the next two seasons. (I discuss the calculations more below.) Now, of course, if these assumptions about the new CBA are way off, my predictions would need to be amended.

2005-06

• Salary Cap - $51.0 million (range of $50.0 to $52.0 million)
• Luxury Tax Threshold - $61.9 million (range of $60.8 to $63.0 million)
• Mid-Level Exception - $5.18 million (range of $5.10 to $5.25 million)

2006-07

• Salary Cap - $49.4 million (range of $47.0 to $52.0 million)
• Luxury Tax Threshold - $59.9 million (range of $57.0 to $63.0 million)
• Mid-Level Exception - $5.66 million (range of $5.35 to $5.80 million)

Yes, you are reading this right. I am predicting the salary cap to be higher than the conventional wisdom of $48 to $50 million this season and then drop quite a bit in 2006-07. In fact, if basketball-related income (BRI) is low enough to generate a $48 to $50 million salary cap, then I expect there to be a luxury tax in 2004-05.

That makes me think that revenues came in about as expected or better than expected, which would likely mean a salary cap of $51 million or higher. (But if revenues came in lower than expected, then a luxury tax in 2004-05 is a possibility.)

The reason for these misforecasts of the salary cap is due to peculiarities in how the league computes projected BRI, which is a key component of salary cap calculations. These peculiarities are not well understood by many teams. Thus, last season several teams were surprised when the salary cap was barely changed, despite the fact that it was reasonably predictable beforehand.

The higher-than-expected salary cap this season is likely to throw fuel on a red-hot free agent market this summer. Teams below the salary cap will have more money available to throw at more free agents. Also, maximum salaries for players like Michael Redd and possibly Larry Hughes, Joe Johnson, Samuel Dalembert, and Tyson Chandler are a given percentage of the salary cap and thus will be higher.

The drop in the salary cap in 2006-07 will reward teams who keep their pocketbooks closed this season. There are likely to be fewer teams with less money below the salary cap next season. This may result in more bargains next summer with the caveat that there does not appear a lot of top free agents available.

My guess is that overall this higher salary cap (and higher luxury tax threshold), along with the lack of free agents available next summer, will result in teams being very aggressive this summer.

Notes about the Calculations

Salary Cap:

Salary cap = [Projected BRI * 0.51 - (29/30) * Projected Benefits]/29, where

• 29 is the number of non-expansion teams in their first two seasons (equals 30 in 2006-07).
• 51 percent is the salary cap percentage that was increased from 48.04 percent in the previous CBA.
• I am using $114 million and $120 million for Projected Benefits in 2005-06 and 2006-07, respectively.
• Projected BRI = Estimated National TV BRI + 1.08 * Previous Season Non-National TV BRI - Previous Season BRI Shortfall.
• Previous Season BRI Shortfall = Previous Season BRI - Previous Season Projected BRI. (This shortfall is never less than zero.)

Because of a $37 million lump sum payment from Fox Sports to the Los Angeles Lakers that will result in a bump up of BRI of about $64 to $74 million, BRI will almost surely exceed Projected BRI in 2004-05. Thus, the Previous Season BRI Shortfall is likely to be zero in the 2005-06 salary cap calculations.

(Note that without that lump sum payment and the accounting quirks that made it count so much in BRI calculations in 2004-05, there likely would be a luxury tax in 2004-05.)

However, because that lump sum payment will not reoccur in 2005-06, the Previous Season BRI Shortfall is likely to be substantial in the 2006-07 salary cap calculations. And that is likely to result in the salary cap falling in 2006-07. (It will also fall because the number of non-expansion teams will increase to 30.)

This adjustment for previous shortfalls is what causes the lumpiness in the year-to-year salary cap calculations. Every other year there is a shortfall and this results in small increases (or decreases) in the salary cap followed by huge jumps in the next year. This is something that could be fixed in the new CBA - something I would highly recommend.

The new CBA also may decrease the 108% multipler for Previous Season's Non-National TV BRI. That multiplier is an artifact of an earlier period where revenues were growing much more quickly. It is because this multiplier is too high that we get the lumpiness in the salary cap.

Note that if this multiplier is changed or the formula for the Projected BRI is changed, then my predictions for the salary cap could be off substantially.

Luxury Tax Threshold:

I think that the luxury tax threshold will now be based upon projected BRI and thus will be known to teams at the time the salary cap is announced. The only difference between the luxury tax threshold and salary cap formulas would be that 0.51 would be changed to 0.6111.

Mid-Level Excption:

Mid-Level Exception = 1.08 * [Previous Season's League-Wide Salaries/(12.5 * 29)]

• League-Wide Salaries do not included expansion teams in their first two seasons.
• 29 is the number of non-expansion teams during their first two seasons.
• Only injured players whose salaries do not count for salary cap or luxury tax purposes are not counted in Previous Season's League-Wide Salaries.

Now again, the new CBA could (and should) lower the 1.08 multiplier. It may also change the assumption of 12.5 roster spots for each team. I would not be surprised if that increased to 14. Either of these changes would lower the MLE.

Last updated: 11:00 PM, July 10, 2005