Segal, Cohen & Landis Reviews Taxes and Basketball

The Fourth of July weekend was interrupted for many Lakers basketball fans as news broke that Dwight Howard was potentially leaving Los Angeles. Fans and sports commentators waited with baited breath as Howard weighed his options. In the end, Howard decided on the move to the Houston Rockets, despite being offered more by the Lakers. Many asked why he would leave behind a bigger contract in California. The answer could lie in one thing—taxes.

The Lakers offered Howard $118 million over four years, while the Rockets offered $87.6 million over four years, which would be a smaller 4.5% annual increase over his existing contract with the Lakers. A recent Forbes article written by a tax expert notes that taxes do matter, as tax advisers have calculated what Howard would receive after taxes in California (with a 13.3% tax rate), and they have decided that it would end up being a smaller amount than in Houston, as Texas has no state income tax. The Forbes writer points out that it isn’t sufficient to merely take note of who is the highest paid, but rather who is bringing home the most money after the requisite taxes are paid.

Another Texan professional athlete is similarly placed in a favorable position due to the lack state income tax—Tony Romo. Romo, who is the fifth highest paid NFL player before taxes, is the number one highest player after taxes. He is an example of how significant the impact of taxes can be on the highest earners.

Last November, California voters approved the raising of tax rates to the high rate of 13.3%, an increase from 10.3%, on taxpayers earning more than $1 million in income. Some think that such a high tax rate will provide an incentive for athletes and other professionals alike to seek out states with lower tax rates, leaving California for greener (money) pastures.

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