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

by CalWatchdog Staff | July 2, 2013 6:00 am

July 2, 2013

By Chris Reed

phil.mickelsonIn January, when Rancho Santa Fe pro golfer Phil Mickelson griped[1] about the Prop. 30-mandated increase in state income taxes to 13.3 percent on California’s highest earners, he was widely pilloried[2] 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[3], 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[4], 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[5], 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[6].)

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[7] — 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[8].

  1. griped:
  2. widely pilloried:
  3. pointed out:
  4. 2012-13 schedule:
  5. 2012-13 schedule:
  6. here:
  7. $12 million a year in endorsements:
  8. just the reason one would expect:

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