The amount that is actually the "cap" varies on a year-to-year basis, and is calculated as a percentage of the League's revenue from the previous season; for instance, in 2005-06, the NBA's salary cap was approximately US$50 million per team, while in 2006-07 it is $53.135 million. Like many professional sports leagues, the NBA has a salary cap to keep teams in larger markets (with more revenue) from buying all of the top players and extending their advantage over smaller-market franchises.
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 one dollar to the League 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 dollars. As an example, the 2005-06 New York Knicks' payroll was $124 million, putting them almost $75 million above the salary cap, and over $60 million above the tax line, which Knicks owner James Dolan paid to the league.
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