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Thursday, June 23, 2011

The NBA Salary Cap Gives No-Tax Dallas and Miami an Unfair Advantage

Finals Mitchell L. Engler (Cardozo) has posted The Untaxed King of South Beach: Lebron James and the NBA Salary Cap, 49 San Diego L. Rev. ___ (2011), on SSRN. Here is the abstract:

In contrast to major league baseball, the National Basketball Association has a salary cap designed to provide every team an equal and fair chance of competing for the championship. The Miami Heat‘s recent incredible success in signing the game‘s three most hotly desired free agents, including mega-stars Lebron James and Dwyane Wade, therefore flies in the face of the NBA‘s attempted level playing field. How could one team so outmaneuver all the others in the sport which tried to eliminate such uncompetitive results via a salary cap?

As discussed in this Essay, the answer lies in the law of unintended consequences and perverse incentives. Some NBA teams are located in more attractive jurisdictions with nicer amenities or lower costs, such as taxes. In particular, Miami provides a highly-favorable climate both as to weather and taxes as Florida does not have a state income tax. In the absence of any salary cap limitations, teams in higher-tax jurisdictions could compete better with Miami for free agent players by offering higher salaries to offset the extra tax. But the NBA salary cap, by its very terms, blocks this usual free-market response.

Having flagged this perverse and unintended benefit to the no-tax clubs, this Essay then proposes an appropriate solution. Rather than scrapping the salary cap and restoring a competitive advantage to the wealthier clubs, a state tax adjustment to the cap amounts would remove the rich clubs‘ advantage without substituting an unintended benefit to the no-tax clubs. The salary cap amounts of no-tax teams simply should be reduced by a percentage equal to the highest state tax rate of any NBA team. After making this simple adjustment, this Essay then refutes more sophisticated arguments as to why the proposed adjustment might go too far. Among other points, this Essay highlights how Miami‘s tax advantage might extend beyond just Lebron‘s salary to include his extensive endorsement income as well. Expanding the analysis to such deeper level therefore highlights an even greater need for a state tax adjustment to the NBA salary cap.

As Rick Bales (Northern Kenkucky) notes, the recnt NBA finals between no-tax Dallas and Miami supports Professor Engler's thesis.

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Comments

They play half their regular-season games in states that can tax nonresident athletes, and they live in states where high real estate taxes offset much of the savings from zero income tax. A resident of a state with an income tax gets back much of it with credits for taxes paid to other states; Floridians and Texans get back nothing on their real estate taxes.

Still, it wouldn't hurt the NBA to allow teams to pay their players' state income taxes, after adjustment for federal income tax savings from the deduction, above and beyond the allowed salary cap amounts.

Posted by: Bob | Jun 23, 2011 1:06:17 PM

The Lakers have really been hurting with their 10.55% rate on earnings over one million.

Posted by: Texan Tech | Jun 23, 2011 1:23:01 PM

For the star who, because of engaging persona and talent, has the potential to really clean up on endorsement money, placement in a major media center often provides him with maximization of total earnings. Michael Jordan in Chicago, Joe Namath in NYC and Kobe in LA ( prior to his legal problems) all provided good examples of the benefit of being in a city where exposure is amplified. Jordan in his early years made about 85% of his money from endorsements. It would have been much harder for him to do that in a city such as Miami. Chris Paul as a member of the Knicks could do much better than he could in a Texas or Florida city. Look for that as a possible smart money move. If the player lacks the persona to really clean up on endorsement money, as many do, then taxes are likely to be a major consideration.

Posted by: Bill Turnier | Jun 23, 2011 7:01:03 PM

Your debt slavery causing tuition money at work, Cardozo grads!

Posted by: anon | Jun 23, 2011 8:08:42 PM

But only in the sense that lower-tax jurisdictions have an advantage anyway.

Posted by: mike livingston | Jun 24, 2011 2:41:39 AM