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Saturday, July 6, 2013

Did Taxes Help Drive Dwight Howard to Sign With the Houston Rockets Rather Than the L.A. Lakers?

DHSeven-time NBA all star Dwight Howard yesterday signed with the Houston Rockets for the maximum free agent contract permitted under the NBA's "Larry Bird Rule" -- $87.6 million over four years (4.5% annual increases over his existing contract).  He spurned a much higher offer from the L.A. Lakers -- $118.0 million over five years (7.5% annual increases).  Several tax folks have run the numbers and concluded that Howard will receive more after-tax income by signing with the Rockets rather than the Lakers, based on California's 13.3% top marginal income tax rate and the absence of a state income tax in Texas, after taking into account the application of various state and local "jock taxes." 

(Hat Tip: Tony Nitti.)

Update:  Slate:  After Taxes, Did Dwight Howard Take a Pay Cut By Moving to Houston?

http://taxprof.typepad.com/taxprof_blog/2013/07/did-taxes.html

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False. Wrong. He would have received almost $9.5 million more, net, in LA, because it is a longer contract with a higher salary. Even if he resigned with Houston after four years, and would be ahead one year, he would still be behind six years out because LA's max salary increases would be based on a much higher base salary than Houston's.

Posted by: BRob | Jul 6, 2013 2:26:32 PM

I doubt if taxes played a big role in this situation. On the other hand, I believe that people do resent the confiscation of their money, and tax policies do play a role, although a relatively minor one, in personal decisions.

I believe that LA was ambivalent about Howard, and Houston showed him a lot of love.

Posted by: Oldflyer | Jul 6, 2013 11:34:28 PM

but it's not as if the top rate in california is going to stay at 13.3%

it's going higher

it's all california knows to do anymore

Posted by: happyfeet | Jul 6, 2013 11:41:31 PM

Wrong! Take into account his endorsement deals and he is way ahead going to Texas.

Posted by: EricK | Jul 6, 2013 11:42:33 PM

Gee BRob, you did not work out the actual math. You try it. 20 mil times 1.075 times .867 show millions of dollars more taking the Houston offer. That comes out to 20900000 in Texas (20 000 000 times 1.045) as opposed to 18 640 500 in California (20 000 000 times 1.075 times .867). Its not all guaranteed up front so the last year is a wash.

Posted by: Ted | Jul 6, 2013 11:59:15 PM

BRob,

Would you please show how you came to that conclusion? Thank you

Posted by: Dawadu | Jul 7, 2013 12:03:01 AM

Hmmm. A Law Professor who blogs on tax matters and backs up his assertions with linked articles from reputable sources written by people who also explore the minutia surrounding tax impact on wealth says the tax savings would make the move attractive.

BRob argues eloquently that it wouldn't, citing zero sources and claiming no special knowledge of tax matters and extensive experience in "what if" scenarios.

I just can't figure out who has more credibility here.......

Posted by: Mitchell | Jul 7, 2013 12:06:07 AM

Howard apparently has an out clause that would let him leave the Rockets after 2015-16, making this a three-year contract. Would need someone to do the math, but over a three-year span, it's entirely possible Texas is a better deal. Also, we're only talking about straight salary -- all of his endorsement and other income $$ also goes untaxed in Texas, and I'd bet that's a fair piece of change.

I've worked in the sports media most of my life (still do), and I'm starting to wonder when the lack of taxes in places like Florida and Texas will really start taking a toll on high-tax states.

Posted by: Don Smythe | Jul 7, 2013 12:11:30 AM

You're forgetting that state income tax savings will be even higher on his endorsement income since none of the various local "jock" taxes will apply. NBA superstars make huge money on national and international endorsements.

Posted by: LenSp1 | Jul 7, 2013 12:34:47 AM

The cost of living is much lower in Houston than LA too; I mean, what kind of house can he get for a couple million in Houston vs California?

Posted by: Jeannette | Jul 7, 2013 12:39:04 AM

The arguement can be made about Taxes shaping pro sports by looking at the two finalists in the NBA this year even, San Antonio and Miami, both non income taxing states. Argue that math doubters. I assume it will get more obvious as the years go on and the Agents representing stars get more wise to this. Or I'm just full of swamp water,take your pick.

Posted by: Rich K | Jul 7, 2013 12:55:41 AM

Don Smythe makes the key argument. It is the non-game revenue which makes the difference. The man will have investments, will own property, and those get whacked in Cally much harder than Texas.

I do not think taxes were everything, but certainly helps Texas make its case.

One other point is that Texas is not as cut off from the east and west coast as the elites would like to think....Howard can be an international spokesman for products. The NBA is a global product.....And while I have trouble proving it with any solid evidence, it does seem that there is more money for local endorsements in Texas than hurting Cally....

Posted by: Mark | Jul 7, 2013 1:01:02 AM

There's something oddly and vaguely racial in the assumptions in newspaper columns that always seem to conclude that a Black athlete goes to a team for "love" (father abandonment) and white athletes go for "money".

Posted by: Andrew | Jul 7, 2013 3:11:03 AM

I'd rather be in Houston, too...at least you're allowed to shoot back.

Posted by: model_1066 | Jul 7, 2013 6:24:26 AM

I think that given the choice between making $87 million and $118 million, I would base my choice on where I wanted to live, which coach and teammates I wanted to play for, and which team I thought had the better chance of winning championships.

Posted by: jms | Jul 7, 2013 12:17:13 PM

And finally a "plus" for California's ridiculously high state income tax--it helped drive the clubhouse cancer/coach backstabber that is Dwight Howard to Houston. As a longtime loather of the Boston Celtics, I should be positively thrilled that Rockets coach Kevin McHale has this menace to deal with--but there are some things that one shouldn't wish even on your worst enemy.

Posted by: M. Scott Eiland | Jul 7, 2013 9:51:26 PM


Another important wrinkle was the option for a sign-and-trade deal where Howard signs with the Lakers at the higher salary with the understanding he'll be immediately traded to the Rockets. But with state income taxes making the pay cut a wash, Howard has little incentive to make the Rockets do the sign-and-trade deal. So instead of the Lakers receiving *something* in return, Howard walks and they get nothing. (Except lots of free cap space to pursue LeBron next summer...)

So another disadvantage of high state tax teams labor under.

Posted by: Brian | Jul 7, 2013 9:56:07 PM

Texas caps the money paid in child support. That's an income tax that is unmentioned by the professor, and yet the savings from relocating to Texas and then signing in Texas instead of California are substantial. The income tax savings mentioned by the profe.ssor are somewhat minimized by the fact that Howard will still pay income tax on his games in states with income tax. But the combined impact of child support savings, property tax savings, and income tax savings are worth a lot to Howard over the lifetime of the contract.

Posted by: Rotten | Jul 8, 2013 12:06:17 PM