Photo: Mike Ehrmann/Getty Images
Here’s the popular explanation for why the Knicks are (maybe) going to let Jeremy Lin go: the luxury tax bill in the third year of Lin’s deal would be way too high.After the lockout, the NBA raised its luxury tax rate — meaning teams that exceed the $70.3 million payroll threshold (the “luxury tax line”) have to pay the league oodles of money in penalties.
Lin will earn an eye-popping $14.8 million in the third year of his $25.1 million contract. This would put the Knicks way, way over the luxury tax line considering they’re already committed to Carmelo Anthony, Amar’e Stoudemire, Tyson Chandler, and Steve Novak for that 2014-2015 season.
But how much, exactly, will it cost the Knicks to keep Lin? And is that cost really astronomical enough to let Lin walk only a few months after he exploded into an international phenomenon in NYC?
The answer largely depends on what other roster moves the Knicks make in the coming years. But we estimate that NY’s luxury tax penalty for 2014-15, with Lin, would be at least $17.5 million and at most $68 million, with the likely number ~$35.5 million. Without him, it would be between $0 to $20.5 million, with the likely number ~$4.2 million.
So signing Lin would cost the Knicks between $17.5 million and $48.5 million just in luxury tax penalties, with ~$31.3 million being the most likely number. If you add Lin’s $25.1 million contract to that luxury rate number, it will cost the Knicks between $42.6 million and $73.6 million to re-sign Lin, with $54.6 million being the most likely estimate.
Here’s how we got to those numbers:
First, we took a look at the Knicks possible roster for 2013-2014. If they honored the contracts of everyone they have on their roster now, and retained their 2013 first-round draft pick, their estimated roster and salary commitments would look like this:
- Carmelo Anthony: $23.5 million
- Amar’e Stoudemire: $23.4 million
- Jeremy Lin: $14.8 million
- Tyson Chandler: $14.6 million
- Raymond Felton (rumoured deal worth $18 million over four years): $4.5 million
- Steve Novak: $3.8 million
- Marcus Camby (non-guaranteed): $3.2 million
- Jason Kidd: $3 million
- Iman Shumpert (team option): $2.7 million
- 2013 first-round pick: $1.3 million
- Three roster spots at the league minimum: ~$1.5 million
This comes out to $96.3 million in payroll, and is probably the most the Knicks will possibly spend. It involves them keeping Marcus Camby (unlikely, considering his contract isn’t guaranteed), picking up Iman Shumpert’s option, keeping the player they draft with their first-round pick in 2013, and retaining both Jason Kidd’s expiring contract and Raymond Felton’s contract. In short, it’s unlikely that the payroll will be $96.3 million.
But it’s definitely possible. And in that scenario, the Knicks would be $26 million over the luxury tax threshold. With the new tax structure, that yields a luxury tax bill of $68 million. (*scroll to the bottom for the nitty-gritty methodology). Without Lin and his $14.8 million contract, the payroll would be $82 million, and the tax bill would be $20.5 million, $48.5 million less than if they kept him.
Once you start trimming the deadwood from the roster, though, the tax number gets more and more palatable.
If they let Marcus Camby walk and replaced him with a minimum salary player, their total payroll would be $93.5 million. That yields a tax bill of $57 million. Without Lin, it’d be $14.3 million.
If they let Camby go and declined to pick up Shumpert’s team option, their total payroll would be $91.4 million. That yields a tax bill of $49.1 million. Without Lin, it’d be $10.6 million
If they let Camby go, declined Shumpert’s option, and offloaded Raymond Felton, their total payroll would be $87.4 million.That yields a tax bill of $35.6 million. All things considered, this is probably the most likely scenario.
If they let Camby go, declined Shumpert’s option, and offloaded Raymond Felton, their total payroll would be $87.4 million. That yields a tax bill of $35.6 million. All things considered, this is probably the most likely scenario.
Their roster would be Anthony, Stoudemire, Lin, Chandler, Novak, Kidd, their 2013 first-rounder, and six minimum salary guys. That’s pretty thin, and they probably won’t shed any more contracts than that if they want to stay competitive. Without Lin, it’d be $4.2 million
BUT, if they wanted to keep cutting salary, they could. If they somehow got rid of Kidd (in addition to Camby, Shumpert, and Felton), they’d have a payroll of $84.9 million. That yields a $27.75 million tax bill. Without Lin, it’d be $450,000.
If they went further and traded their 2013 first-rounder, they’d have a payroll of $84.1 million. That’d yield a tax bill of $25.75 million. Without Lin, they wouldn’t pay the luxury tax.
And if they got really, really crazy and burned the roster to the ground, only keeping Anthony, Stoudemire, Lin, Chandler, and 9 minimum salary players, they’d get the payroll down to $80.5 million. That’d yield a tax bill of $17.5 million. Without Lin, they wouldn’t pay the luxury tax.
So, in short, the least they could pay in luxury taxes if they signed Lin is $17.5 million, the most they could pay is $68 million, and the likely number is $35.5 million.
When you compare that to their luxury tax obligation without Lin, that translates into between $17.5 million and $48.5 million in savings, with $31.3 million in savings in the most likely scenario.
If we add that estimated 2014-15 luxury tax bill to his $25.1 salary, we estimate that it will cost the Knicks $56.4 million to sign Jeremy Lin. But that number could get as high as $73.6 million and as low as $42.6 million.
That’s a lot for a guy who has started less than 40 games in his NBA career. But is it too much?
In February, Forbes estimated that Lin would boost team revenues by $25-$50 million in the 2012-2013 season alone. Over the course of his contract, that works out to between $75 million and $150 million in value. In addition, MSG has seen it’s market cap grow by $600 million since Linsanity began.
Even if the Knicks go wild and push their payroll to $96+ million in 2013-14, Lin’s estimated off-the-field value exceeds the massive luxury tax hit.
*The tax structure is broke up into tiers. The more you go over the luxury tax line, the higher your tax rate is. If the Knicks were $26 million over the line, they’d pay $7.5 million for going over the $5 million tier, $8.75 million for going over the $10 million tier, $12.5 million for going over the $15 million tier, and $16.25 over going over the $20 million tier. The remaining $6 million that they’re over line will be taxed as follows: $5 million at a 3.75X rate, and $1 million at a 4.25X rate. So $7.5M+$8.75M+$12.5M+$16.25M+($5M x 3.75)+($1M x 4.25) comes out to a $68 million bill.
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