As he tries to decide which NBA team to sign with next season, free agent Dwight Howard could be taking a close look at how much he will be paying in taxes in the different cities where he might play.
[IMGCAP(1)]Howard was expected to announce his decision Friday, according to ESPN. He played for the Los Angeles Lakers this past season and has been hearing offers from the team, as well as the Golden State Warriors, but they are both located in the relatively high-tax state of California. Texas could be more appealing then, with its lack of an income tax, and he has also been listening to offers from the Dallas Mavericks and the Houston Rockets. (Howard ultimately decided to sign with the Houston Rockets in a four-year, $88 million deal.)
The Atlanta Hawks reportedly had also been wooing Howard, and the timing could be good, since a group of Georgia Republican lawmakers hope to eliminate the state income tax and introduced legislation in May to do so.
Professor Justin Ross of the Indiana University School of Public and Environmental Affairs, an expert in state finance topics, has studied the effects of state taxes on the movement of the very rich, specifically in relation to professional athletes. He believes that state taxes could be a deciding factor for Howard, just as taxes increasingly drive career decisions of elite athletes worldwide. For example, Tiger Woods and Phil Mickelson have indicated that, because of taxes, they would skip tournaments in California, and Usain Bolt indicated he would no longer race in the United Kingdom.
“Previous research that I’ve done, and others have done as well, has shown that all-star athletes take the taxes into consideration in some way,” he told me Monday. “One way in which you can see this is that teams that play in high-tax states basically end up compensating them for their higher tax bills. That is, the teams that are in high-tax states have to pay more for to be competitive in bringing the athlete into the team.”
Thus, the Lakers and the Warriors might end up having to offer more money to Howard than the Mavericks or the Rockets just to make up for the higher tax bill he would have to pay if decided to stay in California.
“One way to think of it is that teams in high-tax states are at a competitive disadvantage in attracting these types of players,” said Ross.
[IMGCAP(2)]Researchers typically look at the signing salaries to see what the tax implications might be. “The way most of the research has gone about it is to examine the signing salaries,” Ross explained. "Basically the approach is to see how much more does their income rise as the income tax liability is going to increase. The greater the income tax liability, the greater the pre-tax salary becomes.”
While Howard hasn’t said anything about taxes publicly, speculation has been rampant about his impending decision. Other athletes have been more vocal about the role of taxes in their decisions about where to compete and live. Earlier this year, golfers Phil Mickelson and Tiger Woods provoked controversy for comments they made about the role of taxes in their state of residence (see Golfer Phil Mickelson Reconsiders Tax Changes). Mickelson said at a press conference that he might need to move out of California, telling reporters, “There are going to be some drastic changes for me because I happen to be in that zone that has been targeted both federally and by the state and it doesn’t work for me right now.” He later backtracked and apologized for those comments, issuing a statement saying, “Finances and taxes are a personal matter, and I should not have made my opinions on them public. I apologize to those I have upset or insulted, and assure you I intend to not let it happen again.”
Woods weighed in on the Mickelson controversy, claiming that taxes were one reason why he moved from California to Florida, which has no state income tax. “I moved out of here [California] back in ’96 for that reason,” he said. “I enjoy Florida, but also I understand what he [Mickelson] was, I think, trying to say.”
Back in 2010, Olympic champion runner Usain Bolt indicated he would not participate in the U.K.’s Crystal Palace Diamond League meet in London because of British tax rules (see Usain Bolt Sprints from U.K. Taxes). However, he ran at the Olympics in London last year after British authorities made an exception in their tax laws for the Olympics to keep other athletes from bolting the high-profile competition.
“Usain Bolt had said he wasn’t going to race in the U.K. because they would not just consider his race winnings, but all the endorsement income he earns on top of that,” said Ross. “That’s a big deal. Even in the United States, when you’re signing for a team, it’s not just the playing salary that you’re putting up there. You’re likely putting your endorsement salary there too.”