Are sports stars shunning California?

JULY 13, 2010

By JOHN SEILER

Americans recently took a day off from worrying about the Gulf oil spill to wonder where basketball superstar and MVP LeBron James would choose to shoot hoops. According to reports, he might have chosen the Clippers in celebrity-centric Los Angeles. Or the Knicks in media rich New York. Or some other city.

Instead, he choose the Miami Hoops in Florida, which has no state income tax. That means all his home games will be played state-tax free (taxes for away games will depend on the state in which he plays). And he will pay no state taxes on his endorsement deals, which likely will be even more lucrative than his six-year, $110 million deal from Miami.

By avoiding California’s top income tax rate of 10.55 percent, James could save many millions on just his salary, and potentially tens of millions on his salary plus endorsements. That’s a slam dunk.

Calculates Kelly Phillips Erb:

If James had gone to the New York Knicks, the team actively wooing James for nearly two years, he would have been able to sign for more money…. But James, it appears, had done his homework on the tax implications.

Over five years, that means James could save more than $25 million in state taxes alone by relocating to Miami over New York. And that doesn’t count other taxes such as local taxes (New York has a bunch) or property taxes (on average, New Yorkers pay a bigger percentage of their income for property taxes than Floridians). In fact, overall, Florida has a fairly attractive tax picture. Compared to other states, it is ranked by the Tax Foundation as 47th in terms of state and local tax burdens; New York, on the other hand, is 2nd (just behind New Jersey, the home of the Nets, also desperate to sign James).

Tiger Woods has a bad reputation because of his recent scandal. But I remember a decade ago when he left Orange County, where he grew up, numerous stories said he wanted to avoid California’s taxes for Florida’s relatively light levies. According to Forbes, Woods earned $105 million last year from endorsements, meaning he saved about $10 million by not living in California.

He won’t make nearly that much this year. But he’ll still make, and save, a bundle in the Sunshine State.

Taxing decisions

“California’s high tax rates are a major factor in many financial decisions, from those made by big-time sports stars to those made by retirees, people just beginning their careers and middle-class families who are considering starting a new business,” David Kline told me; he’s vice president of communications and research at Cal-Tax, a nonpartisan taxpayers’ group.

Kline also brought up a number of issues:

Tiger also has a large estate in Tahoe (on the Nevada side) – at least he did about 18 months ago when I was there and a tour guide pointed out what he claimed was Tiger’s house!  Since most of his income comes from endorsement deals and golf tournaments outside the state of California, living in a no-income-tax state saves him a huge amount of money each year.

Derek Harper of the Dallas Mavericks once nixed a potential trade to the L.A. Clippers in part because it would have cost him six figures in income taxes to California, according to a blurb I found in one of our publications from 1992.

Kline added that it isn’t just the big-name athletes who make such calculations, but that “there are a lot of trades involving lesser-known athletes that don’t get a lot of attention, but also may involve taxes.  In fact, a lesser-known athlete with a smaller salary, no endorsements and a less assured future in the sport might be even more concerned about current take-home pay.  If he or she has a chance to work and live in a state without income taxes instead of in California, that’s like giving himself/herself a huge pay raise.”

Lost revenue

It’s not only the income tax revenues that are lost when a sports star shuns a high-income-tax state such as California. Also lost are the property and sales taxes.

A big star who buys a $250,000 Bentley in Florida pays about a 7 percent sales tax, depending on the county, or $17,500. None of that goes to the shunned high-tax state.

Perhaps more important, the big star is likely to invest some of his money in local businesses, such as car dealerships or restaurants named after him. So the local economy in the low-tax state gets a boost that doesn’t go to the high-tax state.

The old ball game

A 2007 study, “Baseball Salaries and State Income Taxes: The ‘Home Field Advantage’ of Income Taxes on Free Agent Salaries,” by three professors found that baseball players today like taxes about as much as getting beaned:

The basic implication of this tax difference is a competitive edge for teams in low-tax areas because they have lower team expenses in signing free agents to contracts that pay the same after-tax wage to players….

We find that individuals choosing to play in cities with income taxes must be paid higher pre-tax salaries by an amount that ranges from $150,00 to $300,000

Baseball also has a “luxury tax” imposed not by the government, but by the league for teams whose salaries go too high. It’s supposed to prevent teams in high-ticket markets like  New York, Boston and Los Angeles from getting all the best players.

The professors’ study found that the “luxury tax” of the private league magnifies state taxes:

Since clubs in high-tax cities find they must pay more for the same players, the luxury tax distorts in favor of teams in low-tax cities

The reason is that to get the best players to come to high-tax states, teams must pay higher salaries, making the team more likely to burst through the “luxury tax” threshold and pay the penalty.

Jack’s team

A counter example is the Los Angeles Lakers, who just won their fourth championship in the last 10 seasons despite playing in high-tax California. But they are the premiere team in the league, much as are the New York Yankees in baseball, despite playing in high-tax New York City. And where but with the Lakers do your fans include Jack Nicholson?

Yet in that span, four teams have come from states with no state income taxes: the San Antonio Spurs of Texas, three championships, and the Miami Heat of Florida, one. The Heat in 2006 were led by Shaquille O’Neal, a refugee from the Lakers.

Also in the past 10 years, California has had one baseball World Series winner, the Anaheim Angels in 2002; no Super Bowl winner; and one Stanley Cup Winner, the Anaheim Mighty Ducks in 2007.

In golf, the top money winners (not including endorsements) on the links from 2000-09 were Tiger Woods, seven times, and Vijay Singh, three times. Singh also lives in Florida.

Winners and losers

Let’s add it up. Looking at just one team doesn’t tell us much. Just look at the Lakers, perennial winners, and the Clippers, perennial losers, even though both teams play in the same city and have the same opportunities for free agents and draft picks. But we can look at all four major leagues across the past decade. That’s 122 teams that, combined, that played 1,220 seasons, probably a large enough sampling to make comparisons.

For the past 10 years, here’s how California teams performed:

NBA: Four teams of 30; should have won 13 percent of championships, won 40 percent.

MLB: Five teams of 30; should have won 17 percent of championships, won 10 percent.

NFL: Three teams of 32; should have won 9 percent of championships, won 0 percent.

NHL: Three teams of 30; should have won 10 percent of championships, won 10 percent.

Total: 15 California teams played 122 seasons; should have won 12 percent of championships, won 6 percent (six championships total).

So, of the championships projected for them over the past decade, California teams won half.

John Seiler, an editorial writer with The Orange County Register for 19 years, is a reporter and analyst for CalWatchDog.com. His email: [email protected].