Here is an article explaining it:
Simply put, the luxury tax is a system designed to reward teams for staying under a set limit of spending — and punish those that don't.
As mentioned above, a salary cap does exist in the NBA. The exact cap will be decided during the July moratorium (a period when league officials determine the exact figures for the upcoming season), but current estimates project it will be somewhere around $136 million.
Here's where it gets a little confusing. Teams are allowed to use certain exceptions to exceed the salary cap, including bi-annual exceptions, mid-level exceptions, Bird rights, and more. For more information on those,
you can read up here.
Teams can use exceptions to exceed the salary cap, often by a lot. But they can only spend so much before they get hit with the luxury tax.
There is an additional luxury tax line separate from the salary cap. This year, it is projected to be set at around $165 million. The further teams go past the luxury tax line, the more fees they will have to pay. The exact fees are determined annually using a complex formula, but you can find the figures from the 2021-22 season below, per
HoopsRumors.com.
- $0-5 million above tax line: $1.50 per dollar (up to $7.5 million)
- $5-10 million above tax line: $1.75 per dollar (up to $8.75 million)
- $10-15 million above tax line: $2.50 per dollar (up to $12.5 million)
- $15-20 million above tax line: $3.25 per dollar (up to $16.25 million).
- For every additional $5 million above tax line beyond $20 million, fees increase by $0.50 per dollar.
The penalties are also more severe for teams labeled "repeat offenders." This means they have exceeded the luxury tax line in three out of the last four seasons. Here are the fees for repeat offenders:
- $0-5 million above tax line: $2.50 per dollar (up to $12.5 million)
- $5-10 million above tax line: $2.75 per dollar (up to $13.75 million)
- $10-15 million above tax line: $3.50 per dollar (up to $17.5 million)
- $15-20 million above tax line: $4.25 per dollar (up to $21.25 million)
- For every additional $5 million above tax line beyond $20 million, rates increase by $0.50 per dollar.
Those harsh punishments for teams above the tax line have served as an effective deterrent for reckless spending. Only five teams are projected to exceed the luxury tax line in 2023-24. Those teams are listed below, along with the projected fees they would have to pay.
(All figures taken from Spotrac.)
| Team | Payroll | Luxury tax space | Luxury tax fees |
| LA Clippers | $201.9 million | $-36.8 million | $155.5 million |
| Golden State Warriors | $181.1 million | $-16.1 million | $48.6 million |
| Phoenix Suns | $175 million | $-10.1 million | $16.4 million |
| Boston Celtics | $173.3 million | $-8.3 million | $13.2 million |
| Miami Heat | $173.1 million | $-8.1 million | $13 million |
There is one final wrinkle with the current luxury tax system. As of the 2023-24 season,
a new "second apron" will be added that brings another hurdle for teams well over the luxury tax line. Any team that ends up $17.5 million above the luxury tax threshold will face even more severe punishments, including losing its mid-level exception, essentially limiting them to only signing players on minimum contracts.
