California income taxes – CalWatchdog.com

Prop. 30: Why it hurts CA teams’ chances of signing LeBron James

Chris Reed — Thu, 26 Jun 2014 18:15:20 +0000

NBA superduperstar LeBron James’ decision this week to opt out of his contract with the Miami Heat has led to intense speculation over where the four-time regular-season MVP and two-time NBA Finals MVP might end up.

The current conventional wisdom is that he’s likely to end up back with the Heat. Under NBA rules intended to help teams keep their stars, he can make the most guaranteed money with Miami — a five-year, $129 million deal, averaging $25.8 million a year. Other teams can offer him at most a four-year, $96 million deal (average: $24 million a year).

But in 2010, the last time LeBron was a free agent, he didn’t take the maximum available from his old team, Cleveland, or even from Miami. He took less money because he wanted to join a team ready to make championship runs, and that’s just what happened with the Heat, which made the finals four straight years, winning twice.

So what are the loaded teams this time around? Two teams jump out — the Los Angeles Clippers and the Houston Rockets, which each have two of the 20 or so best players in the league to team with LeBron.

Millions more available in Houston, Miami

But if money is at all a factor for LeBron — not just his salary but how much of a tax bite he faces on his estimated $42 million in annual endorsements — than Proposition 30 is going to hurt the Clippers’ chances badly.

The sting of Prop. 30 on high earners first was highlighted by a sports story in January 2013, when golfer Phil Mickelson said he was considering leaving Rancho Santa Fe and San Diego County because of high taxes. Another San Diegan, small-government crusader Richard Rider, subsequently explained why Mickelson had reason to grouse:

“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%.”

Because of this huge bite, assuming James’ endorsements remained at $42 million, if he played for the Clippers and made $24 million, he would face a 51 percent effective tax rate on his $66 million in income, meaning he would take home a little bit more than $32 million.

Clippers fans can blame CA Dems if LeBron stays away

If he played for Houston, in a state that has no income tax, his 39 percent effective tax rate on $66 million in income means he would take home a little bit more than $40 million. That’s only slightly less then he would make if he returns to Miami, in another state that has no income tax. In Florida, his 39 percent effective tax rate on $67.8 million in income means he would take home about $41.4 million.

Now obviously this is a simplistic calculation of his taxes, which would be subject to other factors, especially given the complex ways many states target the income of visiting pro athletes. But the bottom line is pretty inescapable: Houston and Miami have huge advantages over the Clippers on the money front.

LeBron James may not care about how much money he makes at this point in his life. And one of his very best friends, Chris Paul, is a superstar point guard with the Clippers, where the coach is Doc Rivers, another LeBron favorite.

But if his decision is a close call and he doesn’t choose the Clippers, it’s fair to give some of the blame to Proposition 30 and the confiscatory policies of the California Democratic Party.

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

CalWatchdog Staff — Tue, 02 Jul 2013 13:00:40 +0000

July 2, 2013

By Chris Reed

In 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:

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

Soon 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

From 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.