Smaller markets do have a chance to compete. Just because they are in LA or NY doesn't mean they necessarily want to spend over the Luxury Tax threshold either. Plenty of "small" market NBA teams made the playoffs and won championships in recent years. For instance, Cleveland is a small market (compared to NY or LA most places are.. and in terms of the NBA, Cleveland is one of the more smaller markets) Milwaukee and Utah are probably the NBA's smallest markets, both teams have high quality players and are competitive (Milwaukee's been bitten with an injury bug.. but they were in the playoff hunt last year.. which is what makes you "compete").
Utah even has one of the highest salaries in the NBA (6th according to hoopshype, spending about 20 million less than LA and Orlando, but only about 5 million less than Boston) So I just don't believe that "small markets can't compete when compared to money" statement. Any team can pay whatever they want to put a competitive product out on the floor. Some teams choose to pay more than others, but every team has the opportunity to do that.