Tax policy matters, even in sports world

Published on Saturday, 5 July 2014 21:50 - Written by

By almost any measure, LeBron James is the best professional basketball player on the courts today. And with the whole world watching to see where this free agent will play next year, it’s a good time to consider how taxes might play into that decision.

The difference to James’ take-home pay could be in the millions of dollars.

“LeBron James will have a completely different process and a different priority when he opens his free agency on Tuesday than he did in 2010,” ESPN reported. “Teams that contact James will be informed that he wants no less than the maximum salary number for next season, sources said. The max number for James is projected to be about $20.7 million. In 2010, James accepted a pay cut when he signed with the Miami Heat, taking less than the maximum salary to help make space for other free agents.”

That’s true, of course, but don’t think it was entirely selfless of James. The Heat play in a state that — like Texas — has no state income tax.

What will moving from Florida mean to James? The Heritage Foundation has helpfully charted the player’s projected $20 million salary, minus the hit from state (and local) income taxes.

The Los Angeles Lakers are said to be a top contender for James — but with the highest state income tax rate in the game, at 13.3 percent, James would have to forego $2.7 million for the privilege of playing for L.A.

ESPN reports that the Phoenix Suns are also a top contender. Arizona’s state income tax rate is 4.54 percent, so James would only lose about $940,000 of his salary.

That’s about the hit he would take for playing for the Chicago Bulls (the Illinois rate is 5 percent) and a little less than what he would pay if he went to Cleveland to play for the Cavaliers (Ohio’s rate is 5.392 percent).

If he stays with the Heat, or signs with the Dallas Mavericks or Houston Rockets, he’ll pay no state income tax at all.

The point here is that taxes matter — even to superstar athletes.

The Laffer Curve once again proves to be sound. The Laffer Curve, as expressed by economist Art Laffer, is the principle that raising taxes can have the opposite of the intended effect, by driving away economic activity and thereby reducing revenues. Higher tax rates, less tax revenue.

There are limits and exceptions, of course, but the principle is solid. That’s because money — capital — is mobile. And so are capitalists, by the way — and athletes.

Golfer Phil Mickelson got into trouble last year when he told reporters that California’s recent tax hikes were squeezing him.

“If you add up all the Federal and you look at the disability and the unemployment and the Social Security and the state, my tax rate’s 62, 63 percent,” Mickelson said, as he warned he might leave California.

As Texas lawmakers and local officials chart tax policy in coming months, they should remember that brackets matter, even after basketball season.