What are the implications of Houston trying to avoid the luxury tax?

By now it’s become abundantly clear that the Houston Rockets are trying to dodge the luxury tax this season. The Rockets made three deals at the trade deadline and all of them had some financial implication. While they may have left the deadline a slightly better basketball team, they’re also a substantially cheaper basketball team.

At the onset of the 2018-19 season, it looked like a near certainty that Houston would pay luxury tax for the first time under new owner Tilman Fertitta. The Rockets were comfortably over the tax line with salaries like Chris Paul, James Harden, Clint Capela, and Ryan Anderson on the books. It also looked like Fertitta was willing to pay the tax.

“I have no problem paying luxury tax if I truly think that it truly gives me the chance to win the championship next year,” said Fertitta. “I think that you always have to be realistic enough that – however we plan things, that doesn’t mean it’s going to happen the way we want it to happen. And I can go put a team together (of stars), and be paying $150 million or $200 million in luxury tax, and a couple of guys get injured and I get my ass whipped.”

Then, Anderson was traded to the Phoenix Suns in August in exchange for Brandon Knight and Marquese Chriss. It should be noted that the Rockets were reportedly looking to dump Anderson’s contract for some time, but this trade signaled that Houston was at least thinking about their luxury tax bill.

Houston’s series of transactions at the trade deadline more or less confirmed that they intend to stay under the tax this season. They may not have planned it, but situations changed in regards to Houston’s season and the opportunity opened up.

In fact, if you go back to February of last year, it seemed even GM Daryl Morey had planned for Houston to be a luxury tax team this season.

Before getting into why Houston decided to change paths, let’s discuss the short-term implications of that decision.

The first central question here is: Did the Rockets forgo a significant opportunity cost to upgrade the roster in pursuit of getting under the tax?

To be honest, we may never know the answer to that question. We do know that Houston made a strong push for star swingman Jimmy Butler in October–a move that would’ve almost assuredly put them deep into the luxury tax for the foreseeable future.

So we know that Houston was willing to become a more expensive team if it meant landing a star like Butler. This is at least one positive to take away. What we don’t know is the in-between: was there a deal for a significant non-star player on the table that Houston passed up on in pursuit of not paying the tax? It’s completely possible, but again, we don’t know for sure.

The second important question is: Is it worth getting into the luxury tax for the 2018-19 Rockets?

This may seem like a stupid question, but it’s very important and one that NBA teams have to tackle every season. It’s universally agreed that you should pay the luxury tax if you’re a team with a significant shot at a championship.

However you feel about Houston, they’ve objectively profiled as a team that is likely not going to win the NBA championship this season.

Currently, the Houston Rockets have a +2.1 Net rating which is good for 11th in the league. If you look at the last five NBA champions, they’ve all had at least the a top-four Net rating, with the lowest Net rating owned by the 2017-18 Golden State Warriors (+5.9). FiveThirtyEight’s CARMELO projection system had the Rockets finishing the season 50-32 with a two-percent chance to win the NBA championship.

Is it that absurd to dodge the luxury tax for a team with such low odds at winning the title? That isn’t for us to decide, but the Rockets have clearly made the internal calculus that the opportunity cost at improving the team marginally vs. avoiding the tax completely weighs more in favor of avoiding the tax.

Again, we won’t ever know:

A) If there was a more expensive trade out there to be had that would have dramatically improved the team in the short term.

Or

B) If using vs. not using the taxpayer mid-level exception was the difference between getting a significant contributor on the buyout market or not (e.g.: Markieff Morris, Danuel House, etc…).

Until we know that, it’s hard to fully understand if Houston made the right call.

But enough about the short term implications. Let’s discuss the long-term implications of Houston dodging the luxury tax this season.

It seems like the main reason Houston is opting to dodge the tax is to avoid paying repeater tax in the future. This is based on Fertitta’s comment this summer about the repeater tax being a “horrible hindrance” and his latest public comments:

The repeater tax is a function of the NBA’s collective bargaining agreement that punishes teams for being in the luxury tax for more than three out of four years. While it is reasonable to expect owners to pay luxury tax for a team that has the ability to win a championship, paying the luxury tax may be a tad too much.

The reason for this is title windows are so short to begin with. If you haven’t won a title within 3-4 years of being in the luxury tax, it’s unlikely you’re going to win one going forward. Usually only dynastic situations like the present Golden State Warriors are justified in paying the repeater tax. This is essentially why the repeater tax was put in place in 2011–to prevent dynastic situations.

So if the Rockets are trying to avoid the repeater tax, it may not be a bad idea for this season to be the one they use to dodge the tax. They are already so close to it ($877,610 under) that they may not get another chance to be under it again. Paul’s contract comes off the book in three seasons, so Houston will likely be free and clear of the tax then.

Getting under the luxury tax this season also frees them to spend big for the next three seasons without the ownership mandate of avoiding repeater tax hanging over Morey’s head.

Now, this is with the assumption that ownership will be willing to enter the luxury tax and spend significantly going forward. That hasn’t happened yet and until it does, it’s perfectly reasonable for fans to be upset and demand Houston spend big next season.

For now, it’s probably too early to tell on the frugality of Fertitta as an NBA owner. All that we’ve gathered so far is that he’s not willing to pay the repeater tax, which is more common among NBA owners than one might assume. This is not to defend Fertitta (or any billionaire for that matter). There just isn’t enough data for one to make a definitive assessment.

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