The NBA has the most intricate salary cap system of all professional sports. The NBA uses a “soft cap” salary limitation system. The system has a broadly applied maximum, $63.2 million this year, with many exceptions to increase the maximum team salary.
If a team reaches a total salary of $77 million, this year, they must pay what is called Luxury Tax. The tax effectively forces higher salary teams to subsidize lower salary teams.
The most commonly used exception is the midlevel exception. The midlevel exception allows teams to sign a player, while being at or above the salary cap, for a predetermined salary depending on if the team paid luxury tax in previous years. The midlevel exception can only be used once a year and do not accumulate if a team does not use it.
A lesser known exception is the trade exception. When a team trades a player with a higher salary than the player, or draft pick they acquire, the difference in salary becomes the “Traded Player Exception” (TPE). The team can use the TPE any time over the next year after the trade. A team can acquire several TPEs. If a team conducts two or more different trades and in all trades they acquire a player who is cheaper than the player they traded, that team would have that multitude of TPEs. Each TPE is valued $100,000 more than the difference in value between the assests.
To make it a bit clearer let’s look at the Miami Heat’s TPEs. Early this year the Heat traded center Joel Anthony to the Boston Celtics for guard Toney Douglas. In that transaction Douglas’ salary was $2.2 million less than Anthony’s. That transaction allotted Miami a TPE of up to $2.3 million. I’ll explain later how the Heat use the TPE in a few. Miami also traded Roger Mason Jr. to Sacramento Kings for a 2015 second round draft pick. Obviously, Mason’s salary ($884,293) is higher than the current salary of the second round pick ($0). The traded netted the Heat another TPE worth $984,293.
So how can Miami use their TPEs? Firstly, Miami cannot combine the value of their two exceptions. Miami can trade for a player who earns up to $2.3 million more than the value of the asset they send away. Adding up to $2.3 million to their soft salary cap; making the Heat’s salary up to $65.5 million with the use of the TPE.
Still confused? Let’s look at a real example the Heat could, and probably should, pursue. Chicago guard Jimmy Butler. Butler is on the last year of his contract of $2,119,214 making him a perfect fit for Miami’s $2.2 million TPE.
The trade would be Miami’s 19th overall draft pick to Chicago in exchange for Butler. In this scenario, Butler earns $2,119,214 more than the $0 the draft pick is currently paid. The Heat would then be able to use the $2.3 million TPE to add Butler’s salary to the league’s $63.2 million salary cap, making Miami’s total salary cap $65.3 million.