While it comes up other places as well, the salary cap is largely covered in Article VII, Section 2 of the Collective Bargaining Agreement. 

What is the Salary Cap?

In the NBA, a salary cap is used to maintain a competitive balance amongst teams in the league. By definition, a salary cap is the maximum amount a team can spend on player contracts each year. Without a salary cap, large market teams such as the New York Knicks or Los Angeles can outbid small market teams for the league’s most valuable players. This often occurs in baseball when teams such as the Yankees and Dodgers have payrolls double the league average disrupting the competitive balance. While a salary cap maintains equitable balance in theory, NBA utilizes a soft cap that does allows teams to outspend each other to a certain extent.

According to the Collective Bargaining Agreement, the salary cap is calculated as a percent of all forecasting Basketball Related Income (BRI) for the upcoming season.  This past 14-15 season, the salary cap was set at $63 million with an upper bound luxury tax limit of $76.8 million. In light of the new nine-year, $24 billion TV deal, the salary cap is expected to drastically increase for the 2016-17 season. By some estimates, the salary cap can rise north of $100 million with individual contracts rising to potentially $40 million per year.

Hard Cap vs Soft Cap

When thinking of a salary cap, most people often think of what is known as a hard cap. A hard salary cap does not allow the total payroll for a team to exceed a pre-determined amount. This however is not the case in the NBA, which operates under a soft cap system. Under the NBA’s soft cap, there are exceptions teams allow teams to exceed the salary cap in order to sign players. In particular, this helps teams retain players from the previous season’s roster.  

How the Salary Cap is Calculated

Under the Collective Bargaining Agreement, the salary cap is computed as percentage of projected Basketball Related Income (BRI) less benefits (about $200 million) for the upcoming year. This is determined each July when the NBA projects all BRI for the upcoming season. Currently, players are guaranteed between 50 and 51 percent of league revenues, while salary cap is set at 44.74 percent of projected BRI. The equation below represents a simple depiction of how the salary cap can be calculated. 

If the league and Players Association differ on the amount of projected BRI, then pre-specified calculations can be used to determine the salary cap. This is the annual revenue from broadcast rights plus a 4.5% increase of BRI from the previous season. Over the past few seasons, revenue has increased around 7% due to the increasing number of revenue streams. If actual revenues surpass forecasts, as was the case last season ($4.75 billion vs $4.66 billion respectively), the league owes players 60.5 % of the difference (Actual less Forecast). 

Basketball Related Income

Integral to calculating the salary cap we must understand what exactly falls under “Basketball Related Income”. Intuitively, BRI includes any income related to basketball operations received by the NBA and affiliated brands. From Larry Coon’s CBAFAQ, BRI includes:

- Regular season gate receipts, minus taxes and certain charges including those related to arena financing
- Broadcast rights
- Exhibition game proceeds
- Playoff gate receipts
- The value of all complimentary tickets, minus "excluded complimentary tickets" (1.6 million tickets in 2011-12, increasing by 50,000 each season thereafter)
- Novelty, program and concession sales (at the arena and in team-identified stores within proximity of an NBA arena)
- Parking
- Proceeds from team sponsorships
- Proceeds from team promotions
- Arena club revenues
- Proceeds from summer camps
- Proceeds from non-NBA basketball tournaments
- Proceeds from mascot and dance team appearances
- Proceeds from beverage sale rights
- 40% of proceeds from arena signage
- 40% of proceeds from luxury suites
- 50% of proceeds from arena naming rights
- 50% of the proceeds from team practice facility naming rights
- Proceeds from other premium seat licenses
- Proceeds received by NBA Properties, including international television, sponsorships, revenues from NBA Entertainment, the All-Star Game, and other NBA special events.

There are some income sources not included in BRI, including: proceeds towards expansion teams, fines levied throughout the season and revenue sharing. Since BRI contributes to calculating the salary cap, revenue sharing must be excluded from BRI because it would present an economic advantage to large market teams. Hypothetically, a high revenue generating team such as the Los Angeles Lakers or New York Knicks would drive the salary cap up, forcing small market teams to spend exorbitant amounts to retain players. This leads to an unsustainable system and economic disparity amongst franchises. As a result, revenue sharing is not designated as basketball related income.

Projected future growth

When the new TV deal takes effect for the 16-17 season, ESPN and Turner Sports will combine to pay the NBA $2.6 billion annually. Putting this in perspective, the current deal signed in 2007 costs both networks $930 million annually. The new media rights deal represents a 180% increase from the previous deal. Since TV and media rights are a large portion of Basketball Related Income, the salary cap is expected to increase from its current $67 million to $89 million for the 2016-17 season.