initially it need to make one full copy of anything not being excluded. So if you have a 3tb drive, with say 1tb of data on it, it can't even make the first initial backup on a 500gb drive.
If you truly want time machine to be an incremental backup the general rule of thumb I've heard is to have the backup drive be twice the capacity of the drive it backs up.
For a 3tb drive, I suppose you'd be looking at getting a drobo and stuffing it with 2tb drives?
