NBA salary cap
The NBA salary cap is the limit to the total amount of money that National Basketball Association teams are allowed to pay their players. Like many professional sports leagues, the NBA has a salary cap to control costs, defined by the league's collective bargaining agreement (CBA). This limit is subject to a complex system of rules and exceptions and as such is considered a "soft" cap.
The actual amount of the salary cap varies from year to year, and is calculated as a percentage of the league's revenue from the previous season; for instance, the cap for the 2007–08 season was approximately US $55.6 million per team, and in 2008–09 it was $58.68 million. Under the CBA ratified in December 2011, the cap will continue to vary in future seasons based on league revenues; for the 2014–15 season, the salary cap was $63.065 million and the luxury tax limit was $76.8 million.
- 1 History
- 2 Soft versus hard caps
- 3 Maximum individual contracts under the NBA
- 4 Exceptions
- 5 Free agency
- 6 Rookie scale salary
- 7 Options
- 8 Sign and trade agreements
- 9 Trading and the salary cap
- 10 Waivers
- 11 Released players
- 12 Amnesty clause
- 13 Luxury tax
- 14 Notes
- 15 References
- 16 External links
The NBA had a salary cap in the mid-1940s, but it was abolished after only one season. The league continued to operate without such a cap until 1984–85, when one was instituted in an attempt to level the playing field among all of the NBA's teams and ensure competitive balance for the League in the future. Before the cap was reinstated, teams could spend whatever amount of money they wanted on players, but in the first season under the new cap, they were each limited to $3.6 million in total payroll.
Under the 2005 CBA, salaries were capped at 57 percent of basketball-related income (BRI) and lasted for six years, until June 30, 2011. The 2011 agreement set the cap at 51.2 percent of BRI in 2011–12, with a 49-to-51 band in subsequent years.
Average Player Salary
Soft versus hard caps
Unlike the NFL and NHL, the NBA features a so-called soft cap, meaning that there are several significant exceptions that allow teams to exceed the salary cap to sign players. This is done to allow teams to keep their own players, which, in theory, fosters fan support in each individual city. By contrast, the NFL and NHL caps are considered hard, meaning that they offer relatively few (if any) circumstances under which teams can exceed the salary cap. The NBA version of the "soft" cap is less significant than that of the MLB, which has an infinite allowance to pay players.
Maximum individual contracts under the NBA
The maximum amount of money a player can sign for is based on the number of years that player has played and the total of the salary cap. The maximum salary of a player with 6 or fewer years of experience is either $9,000,000 or 25% of the total salary cap (2013–14: $14,670,000), whichever is greater. For a player with 7–9 years of experience, the maximum is $11,000,000 or 30% of the cap (2013–14: $17,603,700), and for a player with 10+ years of experience, the maximum is $14,000,000 or 35% of the cap (2013–2014: $20,537,650). There is an exception to this rule: a player is able to sign a contract for 105% of his previous contract, even if the new contract is higher than the league limit.
Each team in the NBA can nominate a player on his rookie contract to receive a "Designated Player" contract extension. A Designated Player is eligible for a 5-year contract extension, instead of being held to the standard 4-year restriction. A team can only allocate a single Designated Player contract at any one time (if a team has already extended a rookie contract by using the Designated Player extension they cannot create a second Designated Player contract until the current contract expires, or until the player moves to a different team); however the CBA rules do allow teams to sign a second Designated Player from another team in addition to the one they already have. All teams are limited to having a maximum of two Designated Players contracted on their roster at any time (one which they have created from one of their own rookie contracts, and one which they have acquired from another team).
"Derrick Rose" Rule
A Designated Player may be eligible to earn 30% of the salary cap (rather than the standard 25%) if he passes certain criteria. To be eligible, the player must be voted to start in two All-Star Games, or be named to an All-NBA Team twice (at any level), or be named MVP. Officially titled the "5th Year 30% Max Criteria", it has been dubbed (and is more commonly known as) the "Derrick Rose Rule" after the 2011 MVP, due to the fact that when the criterion was introduced, Rose was the only player in the NBA eligible to sign the maximum extension (due to his MVP award). The reasoning for the rule is to suitably reward players being extended off of their rookie contract who are considered to be of a higher "caliber" than their peers, without restricting them to the lower (25%) salary level. A player may sign a "5th Year, 30% Max" contract before the final year of his rookie contract and before fulfilling the criteria needed to receive the 30% salary grade. Should the player fail to fulfil the criteria before the start of his Designated Player contract, he will receive the standard five year, 25% Designated Player contract. James Harden of the Houston Rockets had such a clause in his contract extension, but failed to meet the criteria. The only player in the NBA who was attempting to qualify for a full 30% contract in 2013–14 was Paul George, who signed a provisional 30%/5 year contract in September 2013. George, who had made the All-NBA third team in 2012-13, qualified by again making the All-NBA third team.
The following players have signed 5 year/30% contracts:
- Derrick Rose (Chicago Bulls) until 2017 (qualified by winning the 2011 MVP award) 
- Blake Griffin (LA Clippers) until 2018
- Paul George (Indiana Pacers) until 2019 (qualified by making the All-NBA third team in 2012–13 and 2013–14)
In addition the following players are known to have signed 5 year/25% contracts:
- Russell Westbrook (Oklahoma City Thunder) until 2017
- Anthony Davis (New Orleans Pelicans) until 2021
- John Wall (Washington Wizards) until 2019
- James Harden (Houston Rockets) until 2018
- Kyrie Irving (Cleveland Cavaliers) until 2020 (was not voted to start the 2015 All-Star Game)
- Damian Lillard (Portland Trail Blazers) until 2021
Kevin Love was eligible for a designated player contract, but the Minnesota Timberwolves opted for a 4-year contract (with a player option year included, potentially allowing him to become an unrestricted free agent) instead. Kevin Durant, Oklahoma City teammate of Russell Westbrook, is currently receiving a Designated Player level salary. His contract was initially drawn up before the lockout—during which the Derrick Rose Rule was implemented—but was officially approved under the provisions of the 2005 CBA by the NBA after the lockout. This has led some people to question whether the Thunder have (with NBA approval) effectively signed two players as their Designated Player, as both are contracted for 5 years.
Because the NBA's salary cap is a soft one, the CBA allows for several important scenarios in which a team can sign players even if their payroll exceeds the cap. The exceptions are as follows:
Once a year, teams can use a mid-level exception (MLE) to sign a player to a contract for a specified maximum amount. The amount of the MLE and its duration depend on the team's cap status. The MLE was initially set at $5 million for a duration of four years for teams that are over the cap either before or after the signing, but under the luxury tax apron, which is $4M above the tax line. Teams above the luxury tax apron have an MLE that was initially set at $3 million with a three-year duration. Teams with cap room, previously ineligible for the MLE, have a new MLE, initially $2.5 million with a two-year duration. The MLE was frozen at the stated levels through the 2012–13 season, since then, it will increase by 3% per season (with the percentage based on the initial amount of the exception, and not compounded). In turn, this means that MLEs in the current 2014–15 season are:
- $5.305 million for teams without cap room, below the tax apron
- $3.278 million for teams over the tax apron
- $2.575 million for teams with cap room
Before the 2011 CBA, the MLE was equal to the average NBA salary for all teams over the cap. Teams with cap room were previously ineligible for the MLE. The Mid-Level Exception for the 2008–09 NBA season was $5.585 million. The MLE was $5.854 million for the 2009–10 NBA regular season.
The bi-annual exception was used to sign any free agent to a contract starting at $1.672 million. Like the mid-level exception, the bi-annual exception was also split among more than one player, and was used to sign players for up to two years, with raises limited to 8% per year. This exception was referred to as the "$1 million exception" in the 1999 CBA, although it was valued at $1 million for only the first year of the agreement.
The NBA allows teams to sign their first-round draft choices to rookie "scale" contracts even if their payroll exceeds the cap.
Larry Bird exception
Perhaps the most well-known of the NBA's salary cap exceptions is the Larry Bird exception, so named because the Boston Celtics were the first team permitted to exceed the salary cap to re-sign one of their own players (in that case, Larry Bird). Free agents who qualify for this exception are called "qualifying veteran free agents" or "Bird Free Agents" in the CBA, and this exception falls under the terms of the Veteran Free Agent exception. In essence, the Larry Bird exception allows teams to exceed the salary cap to re-sign their own free agents, at an amount up to the maximum salary. To qualify as a Bird free agent, a player must have played three seasons without being waived or changing teams as a free agent. Players claimed after being amnestied have their Bird rights transferred to their new team. Other players claimed off waivers are not eligible for the full Bird exception, but may qualify for the early Bird exception. Prior to an arbitrator ruling in June 2012, all players that were waived and changed teams lost their Bird rights. This means a player can obtain "Bird rights" by playing under three one-year contracts, a single contract of at least three years, or any combination thereof. It also means that when a player is traded, his Bird rights are traded with him, and his new team can use the Bird exception to re-sign him. Under the 2011 CBA, Bird-exception contracts can be up to five years in length, down from six under the 2005 CBA.
Early Bird exception
The lesser form of the Larry Bird exception is the "early Bird" exception. Free agents who qualify for this exception are called "early qualifying veteran free agents", and qualify after playing two seasons with the same team. Players that are traded or claimed off waivers have their Bird rights transferred to their new team. Prior to an arbitrator ruling in June 2012, all players that were waived and changed teams lost their Bird rights. Using this exception, a team can re-sign its own free agent for either 175% of his salary the previous season, or the NBA's average salary, whichever is greater. Early Bird contracts must be for at least two seasons, but can last no longer than four seasons. If a team agrees to a trade that would make a player lose his Early Bird Rights, he has the power to veto the trade.
"Non-qualifying free agents" (those who do not qualify under either the Larry Bird exception or the early Bird exception) are subject to the non-Bird exception. Under this exception, teams can re-sign a player to a contract beginning at either 120% of his salary for the previous season, or 120% of the league's minimum salary, whichever amount is higher. Contracts signed under the Non-Bird exception can last up to four years (down from six under the 2005 CBA).
Minimum Salary Exception
Teams can sign players for the NBA's minimum salary even if they are over the cap, for up to two years in length. In the case of two-year contracts, the second-season salary is the minimum salary for that season. The contract may not contain a signing bonus. This exception also allows minimum-salary players to be acquired via trade. There is no limit to the number of players that can be signed or acquired using this exception.
Traded Player Exception
If a team trades away a player with a higher salary than the player they acquire in return (the deal hereafter referred to as "Trade #1"), they receive a Traded Player Exception, also known as a "Trade Exception". Teams with a trade exception have up to a year in which they can acquire more salary in other trades (Trade #2, #3, etc.) than they send away, as long as the gulf in salaries for Trade #2, #3, etc. are less than or equal to the difference in salary for Trade #1. This exception is particularly useful when teams trade draft picks directly for a player; since draft picks have no salary value, often the only way to get salaries to match is to use a trade exception, which allows trades to be made despite unbalanced salaries. It is also useful to compensate teams for losing free agents, as they can do a sign and trade of that free agent to acquire a trade exception that can be used later. Note this exception is for single player trades only, though additional cash and draft picks can be part of the trade.
Disabled Player Exception
Allows a team that is over the cap to acquire a replacement for a disabled player who will be out for either the remainder of that season (for in-season injuries/deaths) or the next season (if the disability occurs during the offseason). The maximum salary of the replacement player is either 50% of the injured player's salary, or the mid-level exception for a non-taxpaying team, whichever is less. This exception requires an NBA-designated doctor to verify the extent of the injury. Under the 2005 CBA, a team could sign a player under this exception for five years; the 2011 CBA now allows this only for one year.
Note that while teams can often use one exception to sign multiple players, they cannot use a combination of exceptions to sign a single player.
A player banned from the league for a drug-related offense who is reinstated may be re-signed by his prior team for up to his previous salary.
There are two types of free agency under the NBA's Collective Bargaining Agreement: Unrestricted and Restricted.
Unrestricted free agent
An unrestricted free agent is free to sign with any team.
Restricted free agent
A restricted free agent is subject to his current team's Right of First Refusal, meaning that the player can be signed to an offer sheet by another team, but his current club reserves the right to match the offer and keep the player. An offer sheet is a contract offer of at least two years made by another team to a restricted free agent. The player's current club has three days to match the offer or loses the player to the new team; the CBA prior to 2011 allowed seven days.
For first-round draft picks, restricted free agency is only allowed after a team exercises its option for a fourth year, and the team makes a Qualifying Offer at the Rookie-scale amount after the fourth year is completed. For any other player to be a restricted free agent, he must be at most a three-year NBA veteran, and his team must have made a Qualifying Offer for either 125% of his previous season's salary or the minimum salary plus $200,000, whichever offer is higher.
Teams are limited in what they can offer an unrestricted free agent with two years or less experience. The maximum first-year salary in an offer sheet is the mid-level exception. The second-year salary can be raised a maximum of 4.5%. The third year salary is limited to the maximum a team has available in their salary cap. The salary in the fourth season may increase (or decrease) by up to 4.1% of the salary in the third season. The offer sheet can only increase in the third season if it provides the highest salary allowed in the first two seasons, the contract is fully guaranteed, and it contains no bonuses. A player's original team can use the Early Bird exception or their Mid-Level exception to re-sign the player.
If the raise in the third season is greater than 4.5% of the first year, the offering team must be able to fit the average of the entire contract under their cap. The accounting is different for the player's original team, where the player's salary for a given year—not the contract's average—is counted against the cap. In some cases, the offering team can exploit a loophole to create what is referred to as a poison pill for the player's original team, potentially forcing the original team to pay the luxury tax by the third season, as the Houston Rockets did in order to sign Jeremy Lin and Ömer Aşık away from the New York Knicks and Chicago Bulls, respectively. This could discourage them from matching the offer sheet.
Before the 2005 CBA, the original team could only use an exception to re-sign a player who had been drafted in the first round. The 2005 CBA allowed teams to use exceptions on non-first-round picks, with the extension named the "Gilbert Arenas Rule". In 2003, Gilbert Arenas, who had been a second-round pick in 2001, signed a six-year, $60 million contract with the Washington Wizards after his original team, the Golden State Warriors, were unable to match the offer since they were over the salary cap.
Players on a team's season-ending roster remain under contract with their respective team until the start of free agency on July 1. During a period in the beginning of July, teams may begin negotiating with free agents, but trades cannot be made and most free agents cannot be signed. The salary cap for the upcoming year is not set until the league's audit is completed by the end of the period. Contracts that are allowed during this period are limited to:
- Rookie scale contracts to first round draft picks.
- A second round draft pick can accept a required tender, which is a one-year contract that teams are required to offer in order to retain their rights to the player.
- A restricted free agent can accept a qualifying offer from his previous team.
- A restricted free agent finishing the fourth season of his rookie scale contract can accept a maximum qualifying offer. The actual amount is not determined until the end of the moratorium.
- Teams may sign players to contracts of one or two years for the minimum salary.
The end of a free agent's contract does not remove him from a team's cap calculations. During the free agency period (from July 1 until the player signs with a team, or the free agent's former team renounces its rights), each free agent carries a specified salary cap charge for his last team, most often called a "cap hold". Normally, the cap hold can be no more than a player's maximum salary, or less than his minimum salary, based on years of service. The only exception is for free agents who made the minimum salary in the previous season; if the league reimbursed the team for a portion of his salary in the last season of his contract, the reimbursement is not counted in the cap hold. Apart from these restrictions, the cap hold varies based on the status of the free agent and his salary in the previous season:
- Bird free agent:
- If not coming off a rookie scale contract, and salary was at or above the estimated average salary,[a] 150% of previous salary.
- If not coming off a rookie scale contract, and salary was below the estimated average salary, 190% of previous salary.
- If coming off the fourth season of a rookie scale contract, and salary was at or above the estimated average salary, 200% of previous salary.
- If coming off the fourth season of a rookie scale contract, and salary was below the estimated average salary, 250% of previous salary.
- If coming off the third season of a rookie scale contract, the maximum amount that the team can pay under the Bird exception.
- Early Bird:
- If coming off the second season of a rookie scale contract, the maximum amount that the team can pay under the Bird exception.
- Otherwise, 130% of previous salary.
- Non-Bird: 120% of previous salary.
Rookie scale salary
First-round draft choices are assigned salaries according to their draft position. The first overall pick receives more than the second pick, the second more than the third, and so on. Each contract is for two years, with a team option for the third and fourth seasons (the previous CBA provided for three-year contracts with an option for the fourth season), with built-in raises every year to compensate for increases in the average salary. A team may elect to exceed rookie scale for a drafted player that was unsigned for which they retained his draft rights three seasons after the draft. The contract would be for at least three seasons, with a maximum value up to the team's available cap room.
In 2013, the scale for lottery picks were as follows:
Second-round picks are not subject to a scale, and technically can be paid anywhere from the minimum to the maximum contract amount. In practice, they rarely receive more than the minimum.
Many NBA contracts are structured with options for either the player or the team. An option simply gives the party that controls the option the right to extend their contract for one more season at a salary no less than the prior year's amount.
Sign and trade agreements
When a team is willing to sign an upcoming free agent, but the player's current team wants something in return, it might be in the best interest of both clubs to execute a sign-and-trade deal. This occurs when one team signs one of its free agents and immediately trades that player to another team. A sign-and-trade is beneficial to both the player and the teams; the player receives a bigger contract than he might ordinarily get from a team that he would like to play for, while the trading club gets something in return for a free agent, and the recipient of the trade gets the player they desire. Sign-and-trades are a reality in the NBA because of the CBA's rules: unlike baseball, where teams losing free agents are compensated with draft picks or cash, NBA teams that lose free agents receive no compensation.
When a team initiates a sign-and-trade agreement, it must trade the signed player immediately; teams cannot renege on the arrangement and keep the player for themselves, using the other team's financial situation to leverage the signee into a more favorable deal for themselves. Also, the contract signed before the trade must be for at least 3 years, with the first year guaranteed. Because of the contract length requirement, the signing team cannot use an exception that cannot be used to offer a contract of 3 or more years.
Under the 2011 CBA, the signed player must have been on the roster of his previous team at the end of the last regular season. Previous agreements allowed teams to sign-and-trade any player to whom they held Bird rights, which do not automatically disappear with a player's retirement—for example, in July 2012, the Los Angeles Lakers still held Bird rights to John Salley, who had not played since 2000. In the 2007–08 season, two teams used sign-and-trades on players who had been out of the league. The Dallas Mavericks signed Keith Van Horn out of retirement as part of a package to acquire Jason Kidd, and the Lakers did the same with Aaron McKie to facilitate their deal for Pau Gasol.
The 2011 CBA puts further restrictions on sign-and-trades. Since the 2013–14 season, the payroll of the receiving team cannot exceed the so-called "apron", set at $4 million above the tax threshold, as a result of the trade, and a team that has used the taxpayers' MLE cannot receive a player in a sign-and-trade. Additionally, the apron becomes a hard salary cap for the first season after the signing. Teams above the apron before the trade cannot receive a player unless the trade leaves the team below the apron.
Trading and the salary cap
- Teams below the salary cap may trade without regard to salary, as long as they don't end up more than $100,000 above the cap following a trade.
- Teams above the cap (or teams below the cap but would end up more than $100,000 over the cap following a trade) cannot acquire more than 125% plus $100,000 of the salary they trade away. Under the 2011 CBA, teams that remain below the luxury tax threshold even after the trade can acquire the lesser of 150% plus $100,000, or 100% plus $5 million, of the salary they trade away. There is no lower limit—teams may divest themselves of as much salary as they wish (or can convince another team to take on) in a trade.
- No free agent signed in the offseason can be traded until December 15 of that year or until three months have passed (whichever comes later), a rule that prevents teams from signing free agents with the intent of using them strictly as trade fodder. For draft picks this moratorium lasts 30 days.
- If teams acquire a player in a trade, they are allowed to trade that player straight-up for another individual player immediately. However, if teams wish to package that player with another and make a trade, they must wait 60 days before doing so.
The tight salary-matching rules of the 2005 CBA often required what NBA cap analyst Larry Coon called "trade ballast"—extra players added to a deal solely for salary matching, who would typically be waived by their new teams. Under that CBA, such players were restricted from rejoining their original teams for 30 days during the season or 20 days in the offseason. This led to what Coon called "wink-wink deals where players are traded with the full expectation of returning later." A notable example of such a deal occurred in the 2009–10 season, in which the Cleveland Cavaliers included Žydrūnas Ilgauskas in their trade with the Washington Wizards for Antawn Jamison. Ilgauskas was waived a week later without ever appearing in a game for the Wizards, and re-signed with Cleveland after the 30-day waiting period passed. Under the 2011 CBA, a player acquired in a trade and waived by his new team cannot re-sign with his original team until one year after the trade or July 1 after the expiration of his contract, whichever is sooner.
Base year compensation
Certain players in the first few months of a new contract are subject to base year compensation (BYC). The intent of BYC is to prevent teams from re-signing players to salaries specifically targeted to match other salaries in a trade (in other words, salary should be based on basketball value, not trade value). A BYC player's trade value as outgoing salary is 50% of his new salary, or his previous salary, whichever is greater. BYC applies only to players who re-sign with their previous team and receive a raise greater than 20%. It also applies only when (and as long as) the team is over the salary cap. Under the 2011 CBA, players subject to BYC cannot be traded before January 15 except in a sign-and-trade, and BYC is only applied to outgoing salary in sign-and-trade deals.
NBA teams can release a player to the waiver wire, where he can stay for 48 hours (during the regular season). While he is on waivers, other teams may claim him, for his existing salary. If he is not claimed, he is said to have "cleared waivers", and is treated like any free agent, able to sign with any team (with the special restriction noted above for players who were traded and then waived).
Released/waived players with guaranteed contracts continue to be included in their former team's payroll. Players whose contracts are guaranteed are included in team salary in the amount they made while they were with the team. Players on non-guaranteed "summer contracts" are not included in team salary unless they make the regular season roster.
If another team signs a released player who had a guaranteed contract (as long as the player has cleared waivers), the player's original team is allowed to reduce the amount of money they still owe the player (and lower their team payroll) by the right of set-off. This is true if the player signs with any professional team—it does not even have to be an NBA team. The amount the original team gets to set off is limited to one-half the difference between the player's new salary and a pro-rated share of the minimum salary for a one-year veteran (if the player is a rookie, then the rookie minimum is used instead).
Both the 2005 and 2011 CBAs contain a so-called "stretch" provision regarding payment of guaranteed money to waived players and its effect on the salary cap.
Under the 2005 CBA, players and teams could alter the schedule of payments to waived players by mutual agreement. The remaining guaranteed salary was equally spread across the remaining years of the player's contract.
The 2011 CBA dramatically changes this regimen. While contracts signed under the 2005 CBA remain under the original scheme, different rules apply to new contracts. When a team waives a player signed under the 2011 CBA, it can spread the remaining guaranteed salary (and its accompanying cap hit) over twice the remaining length of the contract, plus one year. According to Coon, "if a team has an underperforming player with one season remaining at $12 million, the team can waive him and stretch his salary across three seasons at $4 million per season."
The NBA Amnesty Clause provides franchises a means of escaping a contractual obligation to a player whose performance falls far short of the extremely large salary they initially agreed to pay him. Under the 2010 Collective Bargaining Agreement (CBA), each franchise is allowed to waive just one player prior to the start of any season between the 2011-12 and 2015-16 seasons; however, the balance of his salary still contractually owed him will not be included in either the salary cap or luxury tax totals of the team terminating his employment. Each team can "amnesty" a player only once during the 2011-2016 timeframe, and only players signed prior to the 2011-12 season can be "amnestied". The clause can be exercised during the seven days following the NBA's July moratorium period on player transactions.[b] The clause's provisions allow a rival team to claim an amnestied player at a significantly (often, dramatically) reduced salary; the waiving team only has to pay the player the remaining balance. The team with the highest bid acquires the player. If unclaimed, the player becomes a free agent. Teams over the salary cap can only acquire an amnestied player if he becomes a free agent and the offer would be limited to the veteran's minimum contract.
Under the 2005 CBA, one player could be waived prior to the start of the 2005–06 season and not count toward the luxury tax. Unlike the 2011 CBA, the player still counted under the salary cap. The 2005 amnesty provision was derisively named the "Allan Houston Rule", but his team, the New York Knicks, actually didn't use the measure on Houston—they instead applied it to Jerome Williams.
|Season||Season the amnesty clause was exercised.|
|Team||Team that exercised the clause.|
|Player||Player that was amnestied by the team.|
|Next team||The team the player joined after being amnestied.|
|Bid amount||The bid amount used by the next team if the player was claimed off waivers. All unclaimed players become free agents.|
|*||Denotes the team claimed the player off waivers (i.e. he was not a free agent).|
|N/A||Denotes the player wasn't selected to join a new team (i.e. retirement) and/or wasn't bid on.|
- Posey would be retired from the NBA before he could find another team that he could play for.
- Roy initially retired from basketball due to persistent knee injuries and was then amnestied by Portland. However, after a year of inactivity, he returned to the NBA.
While the soft cap allows teams to exceed the salary cap indefinitely by re-signing their own players using the "Larry Bird" family of exceptions, there are consequences for exceeding the cap by large amounts. A luxury tax payment is required of teams whose payroll exceeds a certain "tax level", determined by a complicated formula, and teams exceeding it are punished by being forced to pay bracket-based amounts for each dollar by which their payroll exceeds the tax level.
While most NBA teams hold contracts valued in excess of the salary cap, few teams have payrolls at luxury tax levels. The tax threshold in 2005–06 was $61.7 million. In 2005–06, the New York Knicks' payroll was $124 million, putting them $74.5 million above the salary cap, and $62.3 million above the tax line, which Knicks owner James Dolan paid to the league. Tax revenues are normally redistributed evenly among non-tax-paying teams, so there is often a several-million-dollar incentive to owners not to pay the luxury tax.
The luxury tax level for the 2008–09 season was $71.15 million. For the 2009–10 season, the luxury tax level was set at $69.92 million. The luxury tax level for the 2010–11 and 2012–13 NBA seasons was $70,307,000.
The 2011 CBA instituted major changes to the luxury tax regime. The previous CBA had a dollar-for-dollar tax provision system, which remained in effect through the 2012–13 season. Teams exceeding the tax level were punished by being forced to pay one dollar to the league for each dollar by which their payroll exceeded the tax level. Starting in 2013–14, the tax changed to an incremental system. Under the current system, tax is assessed at different levels based on the amount that a team is over the luxury tax threshold. The scheme is not cumulative—each level of tax applies only to amounts over that level's threshold. For example, a team that is $8 million over the tax threshold will pay $1.50 for each of its first $5 million over the tax threshold, and $1.75 per dollar for the remaining $3 million. Starting in 2014–15, "repeat offenders", subject to additional penalties, are defined as teams that paid tax in previous seasons. In the first season, repeat offenders from in all previous three seasons will pay a stiffer tax rate; from 2015–16 thereafter, teams paying taxes in three out of four years will be subject to the higher repeater rate. As in the previous CBA, the tax revenue is divided among teams with lower payrolls. However, under the new scheme, no more than 50% of the total tax revenue can go exclusively to teams that did not go over the cap. Initial reports did not specify the use of the remaining 50% under the 2011 CBA, but it was later confirmed that this amount would be used to fund revenue sharing for the season during which tax was paid.
For the 2013–14 season, the luxury tax threshold was set at $71.748 million. The Brooklyn Nets, whose payroll for that season was projected to be over $100 million, would face a luxury tax bill above $80 million, resulting in a total payroll cost of $186 million.
Tax levels from 2013–14
|Amount over tax threshold||Standard tax per excess dollar||Repeat offender tax per excess dollar|
|$4,999,999 or less||$1.50||$2.50|
|$5 million to $9,999,999||$1.75||$2.75|
|$10 million to $14,999,999||$2.50||$3.50|
|$15 million to $19,999,999||$3.25||$4.25|
|Over $20 million||$3.75 + $0.50 per $5 million||$4.75 + $0.50 per $5 million|
- Average player salaries for a season are not determined until the NBA completes its annual audit in July. Because the free agency period starts before the actual average salary for the just-finished season is available, the league uses an "estimated average salary", fixed in the CBA at 104.5% of the most recent audited average salary (from one season before the just-finished one), to determine cap holds, Early Bird exception amounts, and salaries for reinstated players until the audited numbers become available.
- For the 2011-12 season, that period was December 9–16, 2011, due to the delayed start of the season after the lockout.
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