Let’s start by defining a luxury tax. A sports league may levy a luxury tax on clubs who make more money than a predetermined threshold. The luxury tax’s goal is to make competition between teams more fair by discouraging teams from paying their players excessive compensation.
The NFL is an example of a league without a luxury tax system. Instead, the NFL uses a strict salary cap, which prevents teams from paying their players more than a set sum. The NFL’s salary cap is $182.5 million for the 2021 season, and teams must stay inside this amount. A team will incur penalties and have money taken out of their salary cap for the following season if they go over the cap.
The NBA, on the other hand, has a structure in place for a luxury tax. The salary cap in the league is “soft,” meaning that teams are permitted to go above it under specific circumstances. A team will be fined by having to pay tax on the amount they exceed the luxury tax threshold, though, if they do. Teams who exceed the $136.6 million luxury tax threshold for the 2021–2022 NBA season will be subject to a tax at a rate ranging from 1.5 to 4.75 times the amount they have surpassed the threshold.
In conclusion, there is no luxury tax system in the NFL. Instead, the league maintains a strict salary limitation, and teams are not permitted to go above it. The NBA, on the other hand, has a luxury tax structure, and clubs are permitted to exceed the salary ceiling in specific circumstances. They will be fined by having to pay a tax on the amount they go over the threshold for the luxury tax, though, if they do.