Only the strongest haters had much bad to say about the Los Angeles Lakers' trade for Dwight Howard. It's the kind of deal that pretty much instantaneously vaults a good playoff team to the ranks of the NBA's few legitimate title contenders. (Though, you know, they still have to figure a lot out.)
Still, not everything is a world of puppy dogs and ice cream for L.A.'s preeminent franchise. Due to Howard's $19.26 million salary for 2012-13 and the increases he'd see should he sign an extension next summer (which seems likely), the Lakers are facing a very large luxury tax payment in future seasons. Cap guru Larry Coon emailed Henry Abbott of TrueHoop with an explanation:
The Lakers will have a tax bill of around $30 million next July, and in retrospect, will view this season as their salad days -- it's the last one where the tax rate is dollar-for-dollar. Starting in 2013-14 the new "incremental" tax takes over, where being $30 million above the tax line will mean paying a whopping $85 million tax bill.
And it gets worse. Starting in 2014-15 teams will pay an even higher rate for being repeat offenders -- defined as paying tax in at least three of the four previous seasons. A team $30 million over the tax line will pay -- brace yourself -- an additional $115 million in luxury tax.
After adding up their payroll, luxury tax bill and revenue sharing contribution (projected to be $49.4 million in 2013-14), even the Lakers have to stop to consider whether this simply can be written off as the cost of doing business -- and that's the future if they're paying players with salaries like Bryant, Howard, Gasol and Nash.
That's a lot of money, obviously, and it would certainly affect the Lakers' decision to keep all those players. Of course, it's also likely they knew those things when they agreed to trade for Howard, so it's not as if this will come as a huge surprise. They think they can pay the tax and have already built those costs into their budget.
There's a general tendency to think of the luxury tax as a penalty, and it is in the sense that anything past a future salary threshold has a negative financial cost. But the key here is that it only affects those who live in luxury, i.e. the very rich franchises who only pay these sorts of salaries because it's financially viable in the first place. The luxury tax acts as a deterrent, but almost as a byproduct, a sort of warning sign for those who cannot pass a certain level of salary without inching towards financial destitution. The Lakers are going to pay a serious luxury tax because they can afford it. All other teams that pay an eight-figure tax in the future (likely the Knicks and very few others) will do so for the same reasons. They pay it because they can.
The luxury tax doesn't really exist for the teams that pay it — it's for the franchises that benefit from the shared revenue it creates. It's a tool meant to level the playing field by raising others up closer to elite levels, not squishing everything closer together. That's not to say that the tax doesn't deter all moves — it'll keep the Lakers from adding important secondary pieces. But the more important issue is that a tax will never stop the league's wealthiest teams from making moves that raise them to contender status in the first place. They can afford it, and in situations such as that a supposedly restrictive luxury tax isn't going to restrict anything.
That doesn't make the luxury tax a bad thing for middle-market and small-market teams — it certainly helps them compete financially and on the court. But it's a small measure, not a wholesale reconfiguring of the form of NBA competition. That would require the sort of changes that we'll only ever see in a moment of full-on crisis.
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