Supporters of the Cleveland Cavaliers, especially the owner of the team, are upset that basketball superstar LeBron James has decided to sign with the Miami Heat. The anger is especially intense because the Cavaliers offered $4 million more over the next five years. But their anger is misplaced, because more money in Cleveland, Ohio, actually translates into about $1 million less disposable income when the burden of state and local income taxes is added to the equation. Rather than condemn James for making a rational choice, local basketball fans should tar and feather Ohio politicians. This story from CNBC walks through the calculations.
…if you match up what James’ salary would be for the first five years in Cleveland and the five years in Miami, you find that the Cavaliers are only offering him $4 million more. That advantage gets erased — and actually gives the Heat the monetary edge over — when you consider the income tax difference. …Playing in Cleveland, LeBron would face a state income tax of 5.925 percent, plus a Cleveland city tax of two percent. Over the first five years of a new contract with Cleveland, James would give back $3,953,060 combined to the state and city for the 41 games each season he’d play at home. But James would have to pay none of that for home games in Miami since Florida doesn’t have an income tax. Athletes have to pay income taxes to states that they play in on the road, so the games he’ll play away from home — whether he played for Cleveland or Miami — are essentially a wash. But there are, on average, 11 away games per season where James would have to pay Ohio and Cleveland taxes. Why? Because he has to pay when he plays in the six areas – Florida, Texas, Washington D.C., Illinois, Toronto and Tennessee – that have no jock taxes. That’s another $1,061,128 he’ll have to pay in taxes that he wouldn’t have to pay in Miami.
New York basketball fans also should be angry. With some of the highest taxes in the nation, many of which target highly productive people as part of a class-warfare policy, New York is bad news for professional athletes. The New York Post, commenting on the probability that James would sign with the Miami Heat, identified the real villains.
…blame our dysfunctional lawmakers in Albany, who have saddled top-earning New Yorkers with the highest state and city income taxes in the nation, soon to be 12.85 percent on top of the IRS bite. There is no state income tax in Florida. On a five-year contract worth $96 million — what he’d get from the Knicks or the Heat — LeBron would pay $12.34 million in New York taxes. Quite a penalty for the privilege of working in Midtown.
Now let’s look at the big picture. The calculations that LeBron James made when deciding to sign with the Miami Heat are the same calculations that companies make when deciding whether to build factories and create jobs. So when people wonder why high-tax states such as Ohio, California, and New York are losing jobs to zero-income tax states such as Florida and Texas, part of the answer should be obvious. And if we move to the global level, folks should not be too surprised that companies and investors, all other things equal, are likely to avoid the United States, with its punitive 35 percent corporate tax, and instead create jobs and build wealth in places such as Hong Kong, Ireland, and Switzerland.
[…] I’ll close by reiterating my caveat about taxes being just one piece of the puzzle. After all, I speculated many years ago that taxes may have played a role in LeBron James going from Cleveland to Miami. But […]
[…] I’ll close by reiterating my caveat about taxes being just one piece of the puzzle. After all, I speculated many years ago that taxes may have played a role in LeBron James going from Cleveland to Miami. But […]
[…] I’ll close by reiterating my caveat about taxes being just one piece of the puzzle. After all, I speculated that taxes may have played a role in LeBron James going from Cleveland to Miami many years ago. But […]
[…] close by reiterating my caveat about taxes being just one piece of the puzzle. After all, I speculated that taxes may have played a role in LeBron James going from Cleveland to Miami many years ago. But […]
[…] And where to play […]
[…] And where to play […]
[…] 17, 2010 by Dan Mitchell The tax benefits of LeBron James’ move to Miami have received a lot of attention, but there’s an even more interesting case on the other side of the Atlantic. The tax laws in the […]
[…] 16, 2010 by Dan Mitchell The tax benefits of LeBron James’ move to Miami have received a lot of attention, but there’s an even more interesting case on the other side of the Atlantic. The tax laws in the […]
[…] 16, 2010 by Dan Mitchell The tax benefits of LeBron James’ move to Miami have received a lot of attention, but there’s an even more interesting case on the other side of the Atlantic. The tax laws in […]
Journalists: what can you do?…
We found your entry interesting so have added a Trackback to it on the Inner West Live weblog :)…
Of course when you add in the millions he’ll make in endorsements, his tax no longer is a reasonable $15 million or 2% of his income. Now it becomes an unreasonable amount of money.
So you really think LeBron made his decision purely because of that $1 million? We’re talking about 2% of his income. There are quality of life and quality of work factors in this decision that supersede that small margin by a long run.
Furthermore, you paint the picture that high tax states are somehow not prospering, which isn’t backed by facts. The most productive states are often the highest tax states as well. The top ten GDP states per capita are as follows:
* Connecticut
* New Jersey
* Massachusetts
* Maryland
* New York
* Wyoming
* Virginia
* New Hampshire
* Alaska
* California
Alaska and Wyoming do not have income taxes and are fairly low tax, but they both have tremendous mineral reserves, which are taxed, that allow them to run their governments. Mineral reserves are eventually depleted though, so what happens then? Further, Alaska is the third most federally subsidized state in the US, and Wyoming is also a net recipient of federal funds.
And here I was about to write a very similar post myself. You must be rubbing off on me.