Jul 12th 2013
UPDATE: Did Taxes Push Howard to the Houston Rockets?
By Teresa Ambord
On July13, the Houston Rockets will hold a press conference to announce free agent Dwight Howard has decided to join their ranks. When you look at the raw figures, this may seem astonishing. The Lakers in California offered Howard a whopping $118 million and a five-year contract. Houston, on the other hand, offered a four-year deal and only $87.6 million. The difference appears to be $30.4 million.
On the surface, the Lakers seem to be holding out more promise in terms of financial compensation and an extra year. But a closer examination presents a different picture.
Take a look at the chart below that was provided by CPA Robert A. Raiola, who heads the Sports & Entertainment Group for the New Jersey–based accounting firm of Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC.
You'll notice the chart does list state income tax for Texas. This is actually jock tax, which is a tax charged not by Texas, but by other states when pro athletes play, train, or perform work-related tasks within their borders. (See below for further explanation of the jock tax.) Raiola estimates the jock tax for Howard would be approximately $536,550 annually on a salary of $21.9 million.
The total four-year Rockets contract will bring Howard a net income of over $50.3 million. The longer five-year Lakers contract would net Howard $59.6 million, a difference of $9.3 million net income.
Nothing but Net?
So just how much did the net income/state income tax issue figure into Howard's big decision? There's no way to know, unless Howard himself gives us a window into his thought process. Of course, if we ask the governors of the two states, they're not shy with their opinions.
Texas Governor Rick Perry has been overtly wooing wealthy Californians for a while, touting his state's tax-friendly policies. And California's Jerry Brown attempts to match Perry comment for comment, showcasing the Golden State's beneficial climate, geography, and access to the entertainment industry, which provides endorsement opportunities for pro athletes like Howard.
Will we ever know the real reasons why Howard is taking his talent to Texas? Maybe not. But as he dons a cowboy hat and heads to Houston, you can practically hear the dismissal from Governor Brown, in typical California-lingo . . .
Free agent NBA basketball center Dwight Howard always seems to be chomping at the bit for new pastures. When he played for the Orlando Magic he was constantly frustrated, demanding to be traded, and irritating his coach with suggestions the coach should be fired. Finally, the Magic sent him packing to the Los Angeles Lakers, though he continued to play on his Florida contract for an additional year.
Now that he's a free agent, he'll be able to decide where he plays. It's been reported that two Texas teams – the Houston Rockets and the Dallas Mavericks – may be wooing him, along with some others, including the Los Angeles Clippers and the Memphis Grizzlies.
Suppose Howard goes to Texas. Will he get a better deal there than in California? It all depends on how you look at it. Just ask Texas Governor Rick Perry and he'll tell you – as he's telling everyone – there's simply no better place to work, live, or visit than the Lone Star State.
California – Where the Gross Is Greener
For Howard, the gross in California is greener by far. If he stays with the Lakers, they're dangling before him a five year contract at $23.6 million per year, for a total of $118 million.
Applying the NBA's new rules, pursuant to the collective bargaining agreement, it's possible for Howard to be offered a five year contract by the Lakers and a salary that exceeds the salary cap. Also, his chances of landing lucrative endorsement contracts may be better in Southern California than just about anywhere else. Considering it's common for pro athletes to supplement their salary by selling their image, this is bound to play a role in the decision.
Then Again, Texas Has Its Own Advantages
With the higher annual salary and the extra year the Lakers can offer, the two Texas teams can't compete with the gross pay and the added security of a longer contract. But let's say Howard opts to join the Houston Rockets anyway. They can give him $21.9 million per year for four years. That's a total of $87.6 million. Doing the math, it works out to $30.4 million less. However, when you look at the after-tax income on a year-to-year basis, Texas trumps.
Here's a comparison, courtesy of CPA Robert A. Raiola, who heads the Sports & Entertainment Group for the New Jersey–based accounting firm of Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC. Note: The calculations in this chart are based solely on Howard's potential contract offers and don't take into account any other type of income.
|State Tax (Jock Tax)||536,550||536,550||536,550||536,550||2,146,200|
Assuming Howard remains in California AND is considered a legal resident of the Golden State, his $23.6 million annual salary will of course be reduced by federal income tax (approximately $8.5 million; see chart). His entire salary also will be subject to the highest state income tax in the nation, which is currently 13.3 percent. This works out to over $3.1 million, just in state tax, according to Raiola's calculations, leaving Howard with net annual income of just under $11.93 million for each of the five years. Note: Players who reside in states with income tax are eligible to take credits for state income tax paid to other states.
What if he opts instead to go to the Houston Rockets (or the Mavericks) AND becomes a Texas resident? His gross annual pay would be $21.9 million, a decrease of $1.7 million per year, compared to the California contract. Federal taxes work out to nearly $8.8 million per year. Texas has no state income tax, which is a nice advantage, though, like any pro athlete who plays outside his home state, he'll be subject to "jock tax."
Jock tax, says Raiola, is determined by applying a fraction and multiplying it by the player's compensation. The numerator of the fraction is the number of duty days played in a given location, and the denominator is the total duty days in a calendar year. Duty days include not only the day of the game, but also the arrival day (generally the day before the game), plus any days spent training or appearing on behalf of the team in states where jock tax is charged.
On a salary of $21.9 million, says Raiola, the jock tax for Howard would be approximately $536,550 on an annual basis. This leaves Howard with a net of almost $12.6 million for each of four years. That's a gain for Howard of $653,340 of net income, each year, even on a much lower annual salary.
Either Texas team would be the same tax scenario. Another option: he could remain in California and join the Los Angeles Clippers. Howard also could choose to play for a California team, but establish residency elsewhere, and avoid California's high state income tax on income not earned within the Golden State.
Then again, he may be seduced to go to Tennessee and become a member of the Memphis Grizzlies. Tennessee does have state income tax, but the tax treatment for professional athletes is mild compared to many other states. There, pro athletes (other than NFL players) are charged a "privilege tax," which is a flat rate of $2,500 per game regardless of income, up to three games, for a maximum of $7,500 per year.
So what's a guy to do? Howard has a lot to consider. Only one thing seems certain for him, and that is, he's never happy where he is for very long. For Howard, the next pasture always looks greener. Before he decides, he needs to weigh all the factors, including the fact that when it comes to monetary compensation, even when the gross is greener, in the end, the net may be sweeter.