Updated: The Brooklyn Nets *could* (but won't) be paying $130 million, the second-most "luxury tax," to lower-payroll teams. (The arena avoids property taxes.)

Update: By trading DeAndre Jordan, they'll save $47 million in luxury taxes.

The Brooklyn Nets are leading contenders to win the NBA championship in the 2021-22 season, and owner (er, "governor") Joe Tsai has opened up the payroll, presumably with the expectation that a winning team will reap new revenues.

In Hoopshype (h/t NetsDaily), Yossi Gozlan 8/27/21 wrote The 2021-22 season will have the largest luxury tax payments ever, noting that seven teams–Brooklyn, Golden State, Los Angeles Clippers, Los Angeles Lakers, Milwaukee, Philadelphia and Utah–are well over the NBA's "luxury tax" and, by next July, are expected to pay a combined $544 million to distribute to the 23 teams with payrolls under the threshold.

Golden State Warriors, with a payroll of $177.9 million, a luxury tax payment of $184 million for a total of $362 million, are number one, because they have a "repeater" tax based on payments over three of the last four seasons.

About the Nets

The Brooklyn Nets, with a payroll of $175.8 million, have a luxury tax payment of "only" $130.6 million, for a total of $306.4 million. Writes Gozlan:

Unlike Golden State, Brooklyn isn’t burdened with the increased tax rates of being a repeat taxpayer. That designation will likely start in the 2023-24 season after three consecutive seasons presumably being in the luxury tax. Kevin Durant recently extended for four years, $198 million and both James Harden and Kyrie Irving are eligible to sign maximum extensions as well. If both get their maximum amounts, all three All-Stars would earn at least $50 million in 2025-26. It will be fascinating to see what their luxury tax payment would be if the Nets still have all three players by then, especially since they’ll be repeaters.

As noted by NetsDaily, the numbers aren’t final, because the "tax" is based on team payrolls as of the end of the regular season, and personnel changes, at least at the margins, are expected.

A contrast with real taxes

It's impossible not to notice, though: the team pays "taxes" to the league, but the Tsai-owned arena operating company pays no property taxes to the city, thanks to nominal state ownership of the arena site.

That means annual payments-in-lieu of taxes (PILOTs), which go to both debt service and an operations and maintenance (O&M) fund.

Those payments do not, of course, go to public entities, but rather bond investors and back into the building itself. And the tax-exempt bonds--thanks to public ownership--have a lower interest rate than taxable bonds. 

All told, the arena operators, over time, save hundreds of millions of dollars in federal and local taxes.

NYC Independent Budget Office, 2009

The chart above shows the NYC Independent Budget Office's 2009 estimates, which are somewhat out of date. 

For example, the Brookings Institution, as noted above, estimated $122 million in savings from tax-exempt financing, not $193.5 million, based in part on a lower amount of bonds. But that calculation was done before a refinancing, which saved an estimated $90 million.

Property tax savings

Separately, as shown in the first graphic, annual payments in lieu of property taxes started at $30.7 million and will rise to $46 million (and keep growing after that)--which should cumulatively exceed $1 billion over the bonds' term. (Some last as long as 2043.)

But the IBO estimated just $146 million (present value) in savings:

The PILOT financing structure depends on the arena tax blocks being exempt from city property tax, but granting this exemption represents an estimated $146 million (present value) opportunity cost. That amount reflects IBO’s estimate of the property tax that would have been owed over 30 years if the arena were assessed as if it were privately owned.

That paragraph came with a footnote related to the fact that part of the site was originally public property:

IBO’s property tax simulation started with a projected assessment based on the cost of the new arena and the land underneath. We then allowed for modest annual growth in the assessed value of the improvements, net of depreciation. Finally, the estimated revenue loss took into account the value of the Industrial Commercial Abatement Program, which is an as-of-right benefit that would be available to any developer building a privately owned facility at the rail yard.

But the cost of developing at the railyard, as the IBO and others have pointed out, was lowered because Forest City had the inside track on that public property. 

(Note that the railyard segment for the arena was relatively easy to develop, albeit in concert with moving the railyard functions, while development at the rest of the site--about two-thirds--requires a costly platform.)