NBA Salary Cap 101: Explaining how the cap and luxury tax work

Being an NBA fan is not just highlight dunks and Kyle Kuzma’s latest zany outfit. For most fans, the transactions of the league — the trades, the signings, the draft picks — are every bit as interesting as the play on the court.

That doesn’t mean it’s easy to follow, however. Understanding how the league’s business gets done requires an in-depth knowledge of the Collective Bargaining Agreement and how teams interact with the salary cap.

If that last sentence was unintelligible jargon or intimidating detail, do not worry! We have you covered here at King James Gospel, where we will be publishing a series of pieces to break down the salary cap and how it will affect NBA teams this offseason and beyond.

What is the NBA’s “salary cap” and how does it work?

A salary cap is a limit on how much money NBA teams can spend on their rosters. The goal is to keep a competitive balance in the league, so that the teams in big markets and with the richest owners cannot simply sign all of the good players. The NBA salary cap is projected to be set at $134 million for the 2023-24 season.

How can teams spend more than the cap?

Sports leagues like the National Football League have something called a “hard” salary cap, where teams cannot exceed that total number for any reason. The NBA uses a “soft” salary cap, whereby a team can exceed the cap under certain conditions. These “exceptions” allow teams to sign or trade for players and exceed the salary cap to do so. Most teams end up over the salary cap in a given year.

What is the luxury tax?

Because there are ways to exceed the salary cap, the CBA also has a “luxury tax” to penalize teams that spend too highly above the salary cap. This is another means of keeping a competitive balance. The luxury tax line for next season is projected to be $162 million, or $28 million over the salary cap line.

Teams that cross the luxury tax line face two penalties. First, the start paying a “tax” on their player salaries, depending on how much higher than the salary cap they spend. That could mean paying $1.25 for every dollar over the tax line you spend, and keep going up from there; teams whose salaries go way over the tax line could be spending four, six or even eight dollars for every dollar spent over the tax.

The second penalty is that the tax amounts are all combined into one big pool, then divided up among all of the teams that stayed below the tax line. Many teams therefore view the luxury tax as something of a “hard” cap, as they don’t want to miss out on that luxury tax payout. For other teams, the tax is the cost of business for fielding a competitive team.

What is a tax apron?

The CBA gives teams certain team-building tools to use, and those differ depending on what a team’s total salary amount looks like. The “Non-Taxpayer Mid-Level Exception,” for example, is available to teams over the salary cap but below the “first tax apron.”

Therefore, if a team signs a player using that exception, they are essentially hard-capped, because they already used the tool that is only available if they stay under that line. The first tax apron is set at $169 million, which is just seven million above the tax line and $35 million above the salary cap.

Wait, there are two tax aprons?

There are now! The new CBA, which comes into effect slowly over the next two offseasons, introduced a second tax apron. For now, teams that spend above $179.5 million will lose access to any exceptions other than minimum contracts. Next offseason more draconian measures will come into play, but teams don’t have to worry about those quite yet.

Why is it called an apron?

Uh, apparently an apron is used to describe a protective layer or border that separates one thing from another – so in clothing that’s a protective layer of fabric to prevent you from getting tomato sauce on your clothes, but in the salary cap it is a border between different levels of spending.

So to really get cooking in the NBA, you need to “wear” the apron?

Ok, I think we’re done here.

Check back soon for the next edition of “Salary Cap 101”!