State income taxes and NBA free agency advantage
By Guest Post
We’re proud to present this guest post from Tim Wieland, who lives with his wife, Lisa, in Des Moines, Iowa where he works as an actuary. In his free time he enjoys running, playing chess, and following the NBA. He can be found on Twitter @Tim_Wieland
As NBA discussion this time of year turns to free agency, you are certain to come across mentions of the Miami Heat tax advantage, or the edge enjoyed by the Texas teams. Franchises situated in locales without a state income tax are able to offer players higher effective salaries, even if the offers have the same nominal value.
A player might accept a lower gross salary amount if his net take home amount remains higher than he could get elsewhere, providing the team both a leg up in free agent bidding and a more beneficial salary cap situation. Was this a contributory factor in Dwyane Wade and LeBron James teaming up in Miami, rather than joining Olympic teammate Carmelo Anthony in New York? No one can be sure, but with this much money at stake, you’d have to think it played at least a small part.
If teams will be pitching free agents on the tax advantages of signing, which teams actually have this advantage, and how big is it? To answer this fully we must examine how NBA contracts are paid out.
NBA players receive game checks and pay taxes based on where games are played. This means that even though there is no state income tax in Texas, Kawhi Leonard still pays California income taxes when he travels to play Steph Curry and the Warriors. As every team plays at least one game in every road stadium, this lessens advantage the Spurs would hold over the Warriors. Instead of Kawhi paying 0 percent and Steph 13.3 percent state income tax all season, both would pay California taxes for the game at Oracle, while both would pay no state income taxes when battling at the AT&T Center.
The advantage, then, is that teams playing home games in low and no tax environments are guaranteed at least half their games will be played in such favorable tax conditions. To calculate how much extra money Kawhi might keep over the course of the season as compared to Steph, we need to know both the income tax rates for each state with an NBA arena, and the distribution of games on the schedule.
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The home state income tax rates for each team can be seen in the chart below. The Raptors throw a wrench into the works with a different tax system compared to teams based in the United States. Differing federal tax rates on top of a different state / province tax rate make the situation for Toronto more complex. While NBA superstars would surely have teams of accountants and agents digging into these details, the tax rate being used for Toronto in this article has been set as the league average. While this makes our calculations slightly less precise, it is close enough to the actual number to not change the order of the other 29 teams. (Note that local taxes sometimes levied by individual counties are not included in the amounts below.)
The NBA schedule is made so that teams play everyone in their division four times, everyone in their conference three times, and everyone in the opposite conference twice. The remaining games to reach the total of 82 come from playing some teams in the same conference four times instead of three on a rotating basis. What this means from a player tax perspective, is that not only will Kawhi and the rest of his Spurs pay no state income tax on home games, they also get two games per season in Dallas, Houston, and Memphis, all in states with no state income tax.
Steph and his Warriors teammates are hurt by this, playing additional games at Sacramento and at both Los Angeles teams. When all is said in done, Kawhi’s average season will have him paying approximately 3.1 percent of his income in state income taxes, while Steph will have to pay an average of around 9.6 percent. This 6.5 percent difference on the first year of a hypothetical $28 million max contract for Kevin Durant comes to an over $1.8 million difference in taxes paid. While state income taxes aren’t the only part of a free agency decision, and each player will have different priorities in lifestyle, team competitiveness, and salary, that kind of money does make a difference.
[Ed. note: These numbers are a necessary simplification for our purposes here. Rules for how much of a player’s salary is considered to be “earned” in a given state varies. Some states count practices as work days, whereas others only look at game days. Additionally, the playoffs can be a complicating factor as well, changing the proportion of work days spent in given locations. The tax rates used are the state’s top marginal tax rates which works to some extent. However, they can also be misleading. For example, California’s 13.3 percent income tax rate only applies to income greater than $1 million. There are several minimum salary thresholds in the NBA which are less than $1 million. Also local income tax rates were used in the calculation. For example, the article indicates a player on the 76ers would only pay 3.07 percent in taxes. Philadelphia has a city income tax between 3.49 percent and 3.92 percent. Thus, a 76er would actually owe state and local taxes double the amount the article indicates. There are about10 cities with NBA teams which have local income taxes. A more precise calculation including as many of these factors as possible]
A complete list of schedule-adjusted state income tax rates can be found below. At the top are the usual suspects in the Florida and Texas teams, with a seldom-talked about Grizzlies team taking advantage of not only the Tennessee tax rate, but also playing in a division with the Rockets, Spurs, and Mavericks. The California teams round out the bottom hoping weather and lifestyle can make up for the difference in money. Teams like the Suns aren’t as appealing as the Arizona rate would indicate, as their division schedule punishes them with lots of California road trips. Although money isn’t everything, with players like David West turning down an eight-figure player option last season to play for the vet minimum in San Antonio, the difference in state income tax does give a few teams a leg up in free agency discussions.
