NHL Finalists Envy NBA Tax Savings
After exciting games this weekend, the NBA and NHL championship series matchups are set. The Miami Heat look to defend their title against the San Antonio Spurs in a rematch of last year’s Finals. The Los Angeles Kings hope to ride the excitement of their winner-take-all victory over Chicago
to stop the surging New York Rangers and their quest for the Stanley Cup.
The two matchups showcase low-tax states (NBA) and high-tax states (NHL). The success of the Kings and Rangers is remarkable given the major effect tax rates have on professional athletes’ incomes.
Rumors are starting to circulate over whether or not LeBron James will stay with the Miami Heat after the end of the NBA Finals. Looking back three years ago, before the 2010-11 season when James made his infamous “decision” to come to Miami, one can see how economics played a factor. James made $19 million in salary this year, excluding endorsement deals. If he had decided to “take his talents” to other possible suitors (the Los Angeles Clippers or New York Knicks), he would have seen $1 million less in take-home pay this year—just because of higher income taxes.
Accounting for James’s $42 million endorsement income, his yearly state income tax savings skyrocket to nearly $4 million. This makes staying in South Beach an attractive financial option for King James.
Last summer, star NBA free agent Dwight Howard decided to go to the Houston Rockets rather than remain with the Los Angeles Lakers. He did this even though the Lakers offered him $118 million over 5 years while the Rockets offered $88 million for 4 years. Taking into account the games he will play in other states (which are taxed at those states’ rates), and the reality that he would be unlikely to take the 5th year option from the Lakers, Howard is set to earn an additional $7 million in after-tax income over 4 years from his move to income tax-free Texas.
Taxes affect NFL players too. Because of differences between state income taxes, this year’s number three pick in the NFL draft is going to make more money after taxes than the number two pick. The NFL employs a system that determines what each draftee will earn, based on his selection order. Greg Robinson, a big offensive tackle out of Auburn, was taken second overall by the St. Louis Rams, and Missouri has a top income tax rate of 6 percent on earnings over $9,000. Quarterback Blake Bortles was taken third overall by the Jacksonville Jaguars, and Florida has no state income tax. Robinson is projected to get $21.3 million over his 4-year rookie contract and Bortles is expected to earn $20.7 million. However, when Missouri’s income tax is subtracted, Bortles actually comes out ahead of Robinson in after-tax income.
When asked about his thoughts on playing in Michigan, Eric Ebron, the Detroit Lion’s first round pick, said, "It's not like Tampa Bay, where everything's tax-free… You try and save money.”
Non-athletes have also noticed the large financial benefit of moving from high-tax states to those without an income tax. On net, between 2000 and 2010, California lost 585,000 residents and $17.2 billion in adjusted gross income to the 9 states that do not have an income tax, according to State Migration Data compiled by the non-partisan Tax Foundation. Over the same time, New York lost 428,000 residents and $16.2 billion in adjusted gross income to the same 9 states.
People respond to economic incentives, and chipping away at their earnings through high state income taxes encourages them to take their talents elsewhere. When possible lifetime tax savings add up to hundreds of thousands of dollars, or millions in the case of star athletes, it eases the pain of packing up and moving.
Jared Meyer is a policy analyst at Economics21 at the Manhattan Institute for Policy Research. You can follow him on Twitter here.
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