For those who do not know, most professional sports leagues utilize a salary cap system that restricts the size of each team’s payroll to fall within a certain threshold. Some sports leagues such as Major League Baseball have a very soft salary cap system. There is a luxury tax limit which is currently $189 million. This system of a soft salary cap creates a disparity among small market teams and large market teams such as the Kansas City Royals and New York Yankees respectively. Since 2001, only one MLB team has won the World Series with a payroll under $100 million. This season, the Los Angeles Dodgers have the highest payroll in MLB at over $273 million, a figure that puts them about $84 million over the luxury tax. Thus on top of that massive payroll, the Dodgers must also pay this tax. Yet the penalties in baseball are not severe enough for a rich team like the Dodgers to care about paying so much money in order to compete for World Series titles by attracting the highest paid free agents. By comparison, the Miami Marlin’s payroll is about $61 million.
The salary cap in basketball is much stricter, as teams who spend above the limit can face harsh penalties. The Brooklyn Nets paid over $90 million in luxury tax last season due to their high team salary along with the fact that they have spent above the salary cap for multiple years in a row and must face repeater violations. For the current 2014-15 NBA season, the team salary cap $66.3 million. When the new TV deal comes into effect in 2016, the salary cap (which is calculated as a percentage of league revenue) is projected to jump to almost $90 million. The league is concerned with the sudden leap and has proposed policies that would allow the cap increase to be smoothed out over several years. The NBA players union has rejected this proposal since they know that team owners will receive the increased TV revenue, and the players want to share the increase in wealth.
If the cap actually does increase by over $20 million, there will be several important implications for teams and players. Players who are approaching the ends of their contracts will be hesitant to sign long-term deals since they know that if they can just wait until 2016, they can receive much more money. It is likely that star players who deserve max contracts will become free agents this summer will sign one year deals now in order to make millions more in 2016. Max contracts for individual players in the NBA function as a percentage of the team cap, so when the cap increases drastically the maximum salary an individual player can receive increases as well.
LeBron James has been one of the first stars to sign a contract in preparation for the cap increase. Last summer he signed a two-year contract with the Cavaliers. James does not intend to leave in two years, he simply wants to hold off on a long-term maximum contract until 2016.
The rising cap also has implications for players who are good, but are not “max guys.” Players such as Brandon Knight or Enes Kanter will likely get overpaid by teams this summer. Although the contracts these players sign will look bad in the present, once the cap goes up their high salaries will have less of an impact on their teams’ salary caps.
In the summer of 2016, even the teams who are currently strapped for cash will be able to sign one or more max players. With all of the players who are due to become free agents that summer, it is certainly going to be a crazy period for free agent signing, and could change the power landscape of the league.