Ducking The Tax

A quick look at the Pelicans' cap sheet and how they can escape the dreaded luxury tax

Frequently with NBA teams, one can take a gander at their salary sheets and presumptively figure out what they might attempt to do next. As the Pelicans head into the doldrums of the offseason, they find themselves roughly $1.16M above the luxury tax line with 13 of 15 roster spots accounted for. The NBA requires teams maintain 14 players on full roster spots and the Pelicans have until the start of the season to reach this number.

Filling the 14th roster spot is not a difficult ask. 2022 second round draft pick, EJ Liddell, can and should be signed to a multi-year deal starting at his minimum. It remains unclear to me whether the Pelicans can sign Liddell using the 2nd round pick exception, but for our purposes, we will assume the Pelicans will sign him using a portion of the mid-level exception (might function as the tax-payer variety if the Pelicans want to keep their options open).

Update - I have been informed that Liddell is ineligible for the second round pick exception due to his status as a two-way player. Only drafted players without a previous deal are eligible and Liddell will receive 1 years of service, which the Pelicans can achieve via converting his current two-way deal. An important note about the tax-payer MLE and the minimum exceptions - the maximum term is limited to two years. If the Pelicans are giving Liddell anything beyond two years, they will have to use the non-taxpayer MLE, which will hard cap them at the first apron. This is potentially problematic if the team has designs to get past the first apron later in the season. History says they will not pass it, but it is not smart business to pre-emptively close the door to accommodate a second round pick. A super neat thing is that even with a two year deal, the Pelicans will retain full bird rights on Liddell because this would push him to 3 years of service. This would come with full restricted free agent rights.

Regardless of which mechanism is used to sign Liddell, his signing will only propel the Pelicans further into the tax. They will have to make additional moves to remove themselves from it. The easiest pathway to duck the tax is to move Kira Lewis Jr.

Lewis’ salary is currently on the books for $5,722,116. This represents a sizeable opportunity for the Pelicans to dip under the tax and create the requisite room for Liddell and another minimum contract. Unfortunately for the former lottery pick, the Pelicans are looking at losing out on valuable revenue share money should they keep him on the roster - an amount that came out to $15.1M this past season. The Pelicans were unable to develop Lewis and now that roster spot doesn’t warrant what might amount to over a $20 million differential.

The cleanest way under the tax is to move Lewis to a team with cap space or a trade exception which can absorb his salary amount. The Pelicans will have enough room to sign Liddell and another veteran - I’m looking at you Garrett Temple.

As you can see, this brings the Pelicans to just under $750K below the tax line. The Pelicans can enter the season with the 15th roster spot open, and opt to fill it later towards the end of the year with one of their two way contacts if they wish.

Unfortunately for the Pelicans, cap space is quickly evaporating from the market. They might have to make a deal where Lewis is outgoing and a minimum level contract is incoming. This would eliminate the projected Temple roster spot if the Pelicans are unable to find a home for the incoming minimum level player. Note - they should be able to take on a player making $2.7M or under and have enough space to sign Liddell.

Now a lot of transactions remain in flux as the moratorium has not lifted and teams might be attempting to string multi-team deals together. Additionally any Damian Lillard and James Harden trades might significantly change the landscape as well. Large deals may present an opportunity for the Pelicans to move money around.

With so many moves in limbo, I do not expect the Pelicans to rush the process of finding Lewis a new home. This may be something that draws into August and even the start of the regular season. My expectation is that the Pelicans will continue to search for deals involving Lewis or Jonas Valančiūnas for the next month or so, before executing a small deal involving Lewis and filling the roster out as described above. They will “run it back” and assess near the trade deadline whether they are good enough to get aggressive and enter the tax or remain status quo.

History says they will not enter the tax at the deadline either, but it is possible they shuffle around some contracts like Valančiūnas to buy themselves tradeable salary for the next season.