Lakers fans may soon appreciate Phil Mickelson’s CA tax gripes

July 2, 2013

By Chris Reed

phil.mickelsonIn January, when Rancho Santa Fe pro golfer Phil Mickelson griped about the Prop. 30-mandated increase in state income taxes to 13.3 percent on California’s highest earners, he was widely pilloried as a heartless rich dude who had freaked out over a small increase in his taxes.

But as San Diego small-government/low-tax crusader Richard Rider subsequently pointed out, Mickelson was not grousing about small potatoes:

“Here’s the fact that EVERYONE (including me) initially undervalued concerning Mickelson and CA state income taxes. Starting in 2013, Mickelson’s NET state income tax has jumped 83.6%!  And yes, this huge increase hits most Californians making more than $2 million income.

“Here’s why. Until 2013, state income taxes were deductible for federal income tax purposes. Starting in 2013, for the really rich, this deductibility largely goes away (as does deducting property taxes and many other deductions). For people with over $2 million of income, they lose 80% of such deductions.

“With Proposition 30 passed in November, CA has raised its income tax on the wealthy by 29%. The combined tax increase is breathtaking. Do the math, and you find that in 2011 the net CA income tax for Mickelson was 6.7%. In 2013 his net CA income tax is 12.3% — an increase of 83.6%.”

Basketball star Dwight Howard: The appeal of no-income-tax Texas

hy_tax-free-weekend_400x4861Soon every Lakers fan may soon be sharing in Phil Mickelson’s pain. Why? Because California’s high income taxes makes the Lakers’ contract offer to its former star center Dwight Howard, a free agent as of Monday, not nearly as attractive as it initially seems. Under NBA rules meant to encourage superstars to stay with the same teams, the Lakers can offer Howard a five-year deal worth $118 million. The Houston Rockets, who seem to be the leading contender for Howard, can offer him a four-year deal worth $88 million.

There’s no state income tax in Texas, so that’s a big plus for the Rockets. But it’s not quite as simple as it may seem. State tax authorities charge income tax on pro athletes from other states who play games in their states. So Howard wouldn’t be free from state income taxes for his whole salary — just for the games he played in Texas and other states with no income taxes. Three states with NBA teams don’t have state income taxes: Texas, Florida and Tennessee.

The actual complications are far more complicated. What follows is a shorthand way to estimate how Howard’s tax burden would play out depending on which team he joins. Based on Houston’s 82-game 2012-13 schedule, 48 would not be subject to any income tax — the 41 games in Houston and the seven in Dallas, San Antonio, Miami, Orland and Memphis. So that means about $51.5 million of Houston’s $88 million offer (reflecting the fraction 48/82) would be shielded from all state income taxes. Four games  — at the Clippers, Lakers, Golden State and Sacramento — would be subjected to California’s high income taxes. That’s about $4.3 million of Houston’s offer (4/82). Thirty would be subject to whatever income taxes are charged by the various states on high earners. That’s about $32.2 million of Houston’s offer (30/82).

Houston vs. Los Angeles: Tale of taxes

The contrast with how Howard would fare in California is sharp. Based on the Lakers’ 2012-13 schedule, 47 games would be subject to California’s highest-in-the-nation state income tax — the Lakers’ 41 home games, their two vs. the Clippers and their two each vs. Golden State and Sacramento. Six games — in Memphis, Houston, San Antonio, Dallas, Miami and Orlando — wouldn’t result in state income taxes being levied.

That means only $6.8 million of the Lakers’ $118 million offer would be shielded from all state income taxes (6/82); $67.6 million of the $118 million offer would be subject to California’s highest-in-the-nation rate (47/82); $43.6 million (29/82) would be subject to whatever income taxes are charged by the various states on high earners.

So let’s do some number-crunching. For the purposes of comparison, let’s assume a net 6 percent state income tax on games not played in no-income-tax Texas, Florida and Tennessee or very-high-income-tax California. (I came up with the net 6 percent estimate by looking at the various state rates here.)

Annual salary: dead heat. Total salary: advantage L.A.

How much would Dwight Howard take home over a five-year contract if he played with the Lakers in California? (I will round off to tenths of a million for simplicity’s sake.)

12.3 percent of $67.6 million = $8.3 million

6 percent of $43.6 million = $2.6 milion

0 percent of $6.8 million = 0

So Howard would pay $10.9 million in total state income taxes over five years with the Lakers — $2.2 million a year. With a $118 million, five-year contract, his average annual salary minus state income taxes would be $21.4 million.

How much would he take home over a four-year contract if he played with the Rockets in Texas?

0 Percent of $51.5 million = 0

6 percent of $32.3 million =$1.9 million

12.3 percent of $4.3 million = $0.5 million

Howard would pay $2.4 million in total state income taxes over four years with the Rockets — $600,000 a year. With an $88 million, four-year contract, his average annual salary minus state income taxes would be $21.4 million — the same as with the Lakers.

Endorsement income: huge advantage for Houston

dwight.howard.mcdonaldsFrom here, there are two ways to look at this picture.

L.A. looks better because it can guarantee a fifth year at $21.4 million net salary minus state income tax. In four years, Howard may not still be good enough to command that big a salary going forward.

But Houston looks better because Howard also makes an estimated $12 million a year in endorsements — and that money wouldn’t be taxed by the state of California at the effective rate of 12.3 percent. It would not be taxed by the state of Texas at all. Assuming his endorsements remained at the same level, over four years, Howard would save $5.8 million in taxes by living in Texas.

All of this is very iffy. Howard might get much more in endorsements in L.A. than Houston.

A reason to leave CA

Still, overall, if Howard is looking for a reason — or one more reason — to leave demanding Kobe Bryant and the high expectations of Lakers’ fans behind, the Texas tax advantages are certainly strong enough to qualify.

And if/when he does leave, maybe Lakers fans finally will have some empathy for Phil Mickelson. He had a point. Taxes in California are ridiculously high on high earners, and there’s nothing wrong with them complaining about it.

Never forget: The most famous non-soccer-playing athlete in the world was born in California. And Tiger Woods moved to Florida the month he turned pro in 1996 for just the reason one would expect.

16 comments

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  1. DavidfromLosGatos
    DavidfromLosGatos 2 July, 2013, 10:01

    If he plays for Lakers and resides in CA, he will have to pay income tax on the games in Texas, etc., and at CA level on all games, since is based in that case on where he resides. Many athletes will reside in a low tax state even if they play for a high tax state team, to at least shield the endorsement income.

    Reply this comment
  2. SeeSaw
    SeeSaw 2 July, 2013, 12:30

    I don’t think that Dwight Howard cares one twit about his tax bill in CA vs. Texas. He just wants to play where he can win a championship. I admire DH as the person that he appears to be–I wish he would remain a Laker–although I will never be able to afford a ticket to a Lakers game.

    Reply this comment
  3. jimmydeeoc
    jimmydeeoc 2 July, 2013, 13:45

    Dwight Howard’s greatest basketball strength is tall. He has zero will to win. He’s the anti-Kobe. (And while I am not a huge Kobe fan – he’s the most arrogant player in the NBA – he is also spectacularly determined. The two often go together.)

    Win a championship? LOL LOL LOL……I can guarantee you…..Dwight Howard will NEVER come within sniffing distance of a championship.

    Reply this comment
  4. SeeSaw
    SeeSaw 2 July, 2013, 14:44

    He was already within “sniffing distance” in 2009. He is a fine human being–as also is Kobe.

    Reply this comment
  5. jimmydeeoc
    jimmydeeoc 2 July, 2013, 15:55

    “He was already within “sniffing distance” in 2009.”

    I hope he remembers that smell. That’s the last whiff he’ll get.

    True, Howard is a fine human being. As to his “Eye of the Tiger”, though….Howard’s got the “Eye of the Housecat”.

    Kobe? Kobe’s a miserable human being, at least during the basketball season. But so was Red Auerbach. So was Bill Russell. So was Jerry West. And so was, certainly, Michael Jordan. Notice a trend there?

    Reply this comment
  6. SeeSaw
    SeeSaw 2 July, 2013, 17:08

    Your opinions still don’t address whether or not Howard will stay or go depending on how many taxes he will have to pay. I maintain that, once a sports-star is in that earning stratosphere, taxes mean nothing–the glory means everything.

    Reply this comment
  7. jimmydeeoc
    jimmydeeoc 2 July, 2013, 17:17

    Which explains why Tiger decided to stay close-to-home in Orange County upon turning pro.

    Wait…..

    What’s that you say?

    Cue Emily Litella in three…….two……one…..

    Reply this comment
  8. jimmydeeoc
    jimmydeeoc 2 July, 2013, 17:22

    BTW – if Howard were to stay….it would be to remain close to Hollywood (he has expressed interest in acting……and has fielded a call from Courtside Jack within the past 24 hours, if ESPN is to be believed.)

    No doubt the calculus is stratospheric state taxes for a few years in exchange for Big Hollywood $$$$ post-career.

    So in the end…yes, it does come down to money.

    Reply this comment
  9. SeeSaw
    SeeSaw 2 July, 2013, 23:41

    CA’s State Income Tax is not as bad as you want others to believe. The percentages are on taxable–not gross, income. My own, lower-middle class income gets marked down by $30,000, before the tax is enacted–my spouse and I have no itemized write-offs–we use the standard deductions available to our earning and age-group. The millionaires have huge write-offs, including the privilege of giving a lot of money to charity. I don’t believe there is a need to feel sorry for them, where CA’s State Income Tax rates are concerned.

    Reply this comment
  10. jimmydeeoc
    jimmydeeoc 3 July, 2013, 00:32

    “My own, lower-middle class income gets marked down by $30,000………”

    ?????????????????????????

    I hope you have a good tax attorney.

    You’re gonna need it.

    Reply this comment
  11. jimmydeeoc
    jimmydeeoc 3 July, 2013, 00:37

    That sounds a bit much…..but then again you said you are retired, so I presume much of your pension income is non-taxable? I dunno……I am not up on Cal tax code.

    I am aware of Cal tax RATES however. Which makes your opening statement ludicrous.

    Reply this comment
  12. Mark Sheppard
    Mark Sheppard 3 July, 2013, 08:51

    It is very hard to feel sorry for somebody who is still left with tens of millions of dollars for playing a sport. Apparently I went to school to get a BA and a Masters’s degree to earn $12.00 per hour with no benefits for the rest of my life.

    Reply this comment
  13. Rex the Wonderdog!
    Rex the Wonderdog! 3 July, 2013, 09:00

    SeeSaw says: July 2, 2013 at 11:41 pm CA’s State Income Tax is not as bad as you want others to believe.
    ==
    Why does seesaw spout such nonsense????

    Reply this comment
  14. Ulysses Uhaul
    Ulysses Uhaul 3 July, 2013, 18:51

    Poodle…relax….Adelanto will not raise taxes on your Tremor Worm Bunker…..the true and only town tourist attraction!

    Reply this comment
  15. SeeSaw
    SeeSaw 3 July, 2013, 19:20

    All of our income is state-taxable, except the 85 percent of my spouse’s SS income that is taxed by the Feds. We get double credits and a higher standard deduction because we are both over 65. I follow the forms and the rules–anybody can do their own taxes if they are just taking the standard deductions. Our total state income tax liability was, in round figures, $1800. Its right there in the charts Jimmy–no tax attorney needed. I gladly pay the State of CA $1800 in state income taxes, to help in the upkeep of this magnificent, massive state. If you think that is bad, there is something wrong with you–there is no such thing as a free lunch.

    Reply this comment
  16. SeeSaw
    SeeSaw 3 July, 2013, 23:24

    I only deal with facts Rex. It is your non-factual rhetoric that is nonsense!

    Reply this comment

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