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The King knows Economics

July 9, 2010 - Bill Speer

By now everyone knows that NBA star LeBron James is taking his talent to South Beach and going to play for the Miami Heat next season.

While writers and bloggers have covered this subject to death, let me just offer one other perspective to the story, that from an economist. Aaron Merchak wrote a piece for the Tax Foundation where he explains the move is better financially for LeBron, who would have made less money in the long run staying in Cleveland.

Here's the article. I think you'll find it an interesting twist to an interesting story.

State Jock Taxes: Is LeBron Better Off in Miami?
By: Aaron Merchak
 
Tonight, at 9 p.m. on ESPN, LeBron James will sit down with America to tell us where he will be playing basketball for the next five or six years. So let’s take a second amidst all of this NBA free agency madness to discuss what LeBron really should be concerned about, jock taxes. Those are the nonresident state income taxes that states and cities strictly enforce on athletes while letting almost everyone else go scot free.
 
Because of the Larry Bird Exception in the NBA salary cap, designed to help the home team keep its star players, the Cleveland Cavaliers can offer James roughly $100.2 million over 5 years while other teams can “only” offer him $96.1 million. Cleveland is also permitted to offer him an extra year on the contract, but as we compare the deals that he can get in various cities, we will consider only the first 5 years.
 
That extra $4.1 million that Cleveland can offer LeBron comes out to about an extra $10,000 more per game. But how much of that would he get to keep? Let’s say LeBron has the choice to stay in Cleveland or go play with the Miami Heat. James may have a higher salary in Cleveland, but Florida has no state income tax. Ohio, on the other hand, has a top rate of 5.925%, plus Cleveland’s own income tax rate of 2%, for a total of about 8%.
 
That makes Miami look like a clear winner because 8% of $100 million is $8 million, almost double the Cleveland salary advantage. But not so fast Florida. True, if James plays in Miami, none of his neighbors will be paying state income tax, but thanks to the jock tax, LeBron will.
While most people who travel in their jobs pay state income tax only to their home state, which is zero in Florida, athletes get special attention. In the NBA, each player’s per-game salary is computed, and whenever a team is on the road, the players must pay whichever tax rate is higher, the home state’s or the away state’s.
 
How does this work out for LeBron if he chooses to play in either Miami or Cleveland? First let’s consider all of his 41 home games in either city. Because Florida has no income tax, LeBron’s home game income tax liability is zero. On the other hand, were LeBron to play in Cleveland, he would pay Ohio’s progressive tax with a top rate of 5.925% plus Cleveland’s flat income rate of 2% on all 41 home games. On LeBron’s Cleveland salary of about $244,000 a game, LeBron would be paying $9,900 in tax on each game he plays for the Cavaliers, compared to zero playing for Miami. In other words, James would be losing almost all of his salary advantage for playing with Cleveland, and that is only for half of his games.
 
So now let’s consider jock taxes paid on the road. There are 6 places that effectively have no jock tax: Florida, Texas, Washington D.C., Illinois, Toronto and Tennessee (Illinois has a jock tax but it is retaliatory and therefore doesn’t apply to athletes from Florida, while Tennessee has a jock ‘fee’ and it cannot be credited on state income tax forms). Because of Ohio’s income tax laws, LeBron would be forced to pay Ohio and Cleveland’s income taxes for each game played in those no-jock-tax locations if he were to play for Cleveland. But Florida would charge him no income tax while he was there. So that’s another Miami advantage for 10-to12 games per year, during which LeBron, as a Cav, would be forced to pay roughly $211,000 ($2,600 per game) in income taxes that he wouldn’t have to pay if he joins Miami.
 
Therefore, even though LeBron’s salary would be $10,000 more per game if he stayed in Cleveland, he would be paying $12,500 more in taxes. The rest of the road games are pretty much a wash between the two cities. When playing in California, New York and other destinations, players from Ohio and Florida pay the same, the tax rate of the state they’re visiting.
 
Of course these numbers are only estimates and do not account for the possibility of playoff games, possible increases in state tax rates or changes in the NBA salary cap. It should also be noted that if you include LeBron’s 6th year as a Cavalier, the tax benefits of playing for Miami would only cut Cleveland’s salary advantage by about two-thirds.
 
So Miami has a clear tax advantage, but what about some other possible destinations for LeBron, like Chicago, New York, New Jersey and Los Angeles? Although Illinois has a low, flat income tax rate of 3%, Chicago athletes are at a distinct disadvantage because Illinois is the only state that does not permit their resident athletes to credit jock taxes they’ve paid against their own state income tax liability. That means that these athletes pay 3% of their income to Illinois, plus any jock taxes levied against them. If LeBron were to go to Chicago, he would pay the same amount that he would pay in Miami, plus 3% of his earnings. At $234,000 a game, for 5 years, LeBron would be paying over $7,000 more per game in taxes for Chicago then he would for Miami. As far as New Jersey, Los Angeles and New York go, each state has a much higher state income tax than Cleveland, with the top rates being 8.97% in New Jersey, 10.55% in California, and 12.62% in New York City. Although, this may not matter much for the Knicks, who say that the city of New York would make LeBron a billionaire.
 
I have a bad feeling that amidst all of the free agent ‘summits’ LeBron has been attending and Family Guy episodes he has been starring in, he hasn’t had time to calculate his income tax liability in each state and figure out which team can offer him the most money. Someone should really hurry up and inform him before he announces his decision tonight, in case he wants to change his mind.
 

 
 

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