Did Income Taxes Send LeBron James To Miami ?
Did LeBron James pick Miami because of income taxes ? Probably not.
The Cato Institute’s Dan Mitchell asserts that the explanation for why LeBron James decided to leave Ohio and pursue a contract with the Miami Heat can be found in state income taxes:
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 James $4 million more over the next five years. But their anger is misplaced because more money in Cleveland 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.
In Ohio, for example, state and city income taxes would have essentially erased whatever extra money the Cavaliers offered James:
[I]f 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. With the help of Aaron Merchak of the Tax Foundation, a non-partisan tax research group based in Washington, D.C., we crunched the numbers.
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.
The situation would have been worse if LeBron had signed with the New York Knicks or soon-to-be Brooklyn Nets:
If LeBron James goes to the Miami Heat instead of the Knicks, 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.
The other side of the coin, of course, is that playing in New York would have led to much more lucrative endorsement deals — some analysts suggested that he could earn as much as $ 1 billion if he came to New York — although those earnings would also have been subject to the higher New York tax.
Mitchell goes on to compare LeBron’s decision to the decisions that corporations make:
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.
Really ? I’m not so sure.
While I’m sure that LeBron James had many conversations with his accountant and business advisors about the tax implications of the various contracts that were offered to him, I’m not at all certain that his primary motivation in choosing Miami was because of the lack of a state income tax. If that were true, then the Florida Marlins and Tampa Bay Rays would be the two best teams in baseball because all of the best players would go there to avoid state income taxes. What actually happens, of course, is that you see players like C.C. Sabathia, Alex Rodriguez, and Derek Jeter going to the “high tax” New York Yankees.
Why ?
Because, like everyone else, professional athletes are motivated by a variety of factors that have little to do with economics or how much they’ll end up paying taxes. In James’s case, that includes the desire to have a chance win NBA Championships, something that just wasn’t happening in Cleveland because he was merely the best player on a team that, without him, is rather mediocre.
Moreover, the actual impact of the taxes on the decision would seem to be rather small given the fact that James’s net worth is reported to be in the area of $ 100 million. For someone in that position, an extra million or two in income taxes isn’t necessarily that big of a deal.
So, yes, I’m sure that LeBron James was aware of the tax implications of his decision, but I seriously doubt that it was the most important thing on his list of reasons to leave Ohio.
And nobody would ever sign with the Toronto Raptors, because they’d have to deal with the 5-percent GST on everything in addition to income taxes.
LeBron, be it noted, said that he was taking his talent to South Beach before mentioning the Miami Heat; I suspect that the beach was more of a draw than the accounting implications.
I agree that championships, lifestyle, and endorsement opportunities were all more important than taxes. Bu there’s no doubt that the Florida teams — and those in other low tax states — have a significant advantage in recruiting free agents.
LeBron and Wade could all gone to the Chicago Bulls and been on a much, much better team. And Wade is from Chicago. I imagine that the differential tax rates were at least a factor in deciding on Miami instead.
I imagine that the differential tax rates were at least a factor in deciding on Miami instead.
I really highly doubt this. I’m with CGHill: This was a “go to South Beach to party with two of my friends”-level decision, and 25 year old guys who think along those lines don’t strike me as the type to even know the tax burdens of different states let alone use that knowledge to guide their decision making.
Of course, they have business advisers to point out these fine points, but ESPN is reporting that James (as did Chris Bosh) took $15 million less than the maximum over six years to make these deals work and leave Miami enough spare change to fill the rest of the roster. That sum eclipses any conceivable tax angles. (Even Dwyane Wade took a pay cut.)
There are compensations, not least of which is the early-termination option after year four.
“Because, like everyone else, professional athletes are motivated by a variety of factors that have little to do with economics or how much they’ll end up paying taxes.”
Yeah, I noticed that when he finally got around to saying where he was going, he didn’t say “Miami,” he said, “South Beach”. Hmmm. (Ah, notice the other folks upthread got there first. Cool.)
It probably doesn’t affect LBJ, who is focused on national endorsement deals, but for many players the difference in value in local endorsement deals between large and small markets would be considerable.