Did Taxes Push Dwight Howard to Houston?

Moneybox
A blog about business and economics.
July 8 2013 10:27 AM

After Taxes, Did Dwight Howard Take a Pay Cut By Moving to Houston?  

170214135
CULVER CITY, CA - JUNE 08: Is Dwight Howard really taller than a giraffe?

Photo by Kevin Winter/Getty Images for Spike TV

I've seen many links to this Paul Caron blog post arguing that Dwight Howard didn't really take a pay cut by moving to Houston once you take taxes into consideration, but I'm not sure the math adds up. The Lakers offered him $118 million over five years (the maximum they were allowed to offer) while Houston offered just $87.6 million over four years. On the flipside, though, California has a top marginal income tax rate of 13.3 percent to Texas' zero income taxes.

On the face of it, the pay cut from going to Houston is bigger than 13.3 percent. On the other hand, it's not a strict apples-to-oranges comparison. The main reason the total value of the Lakers' contract is so much larger is that it includes an extra year. On a per year basis, the pay cut from going to Houston is relatively modest.

Advertisement

But then on the other hand, 13.3 percent is a big overstatement of Howard's effective tax rate. For starters, it's a marginal rate on taxable income so much of Howard's money won't be subject to that taxes. Another important consideration is that state and local taxes are deductible for federal tax purposes. Which is to say that for every extra $10 in state income taxes Howard would pay by living in California, his federal income tax bill is reduced by $3.96.

So if we oversimplify a bit a bit and say the Lakers offered to pay $23.6 million per year and Houston offered to pay $21.9 million a year the question is does Howard receive $1.7 million in annual tax benefits from living in Texas? Well, 13.3 percent of $23.6 million is $3.14 million in extra state income taxes. On the other hand, that'd earn you a $1.24 million federal income tax deduction. So that looks like Howard's after-tax income in California might be $200,000 lower than in Texas. But of course that's assuming that Howard's full nominal income would be taxed at the top California marginal rate, which seems unlikely. When you consider that professional athletes are also hit with jock taxes for playing in road games, it looks like a wash to me on a year-to-year basis. Then you have to consider the value of that fifth year. The most likely scenario, of course, is that at the end of his four-year deal with Houston, Howard will be able to sign another lucrative contract. But that's not necessarily the case. It's totally possible that Howard will have a career-ending injury over the next four years, or that poor play will lead his perceived market value to plummet. Alternatively, if he plays very well the problem with the Houston deal will be that under the NBA's collective bargaining agreement the amount of money a player is eligible to be paid in year N+1 is a function of his salary in year N. If we assume that four or five years from now Howard would be able to command an additional max contract, then the foregone raises in Houston could be even more costly.

Long story short, I doubt that Howard has done his finances a favor by moving to Texas. But that is due to some idiosyncratic features of the way the NBA collective bargaining agreement handles superstar players. A lesser performer fielding two mid-level contract offers could substantially increase his after tax income by signing with the Rockets, Mavericks, Spurs, Heat, or Magic rather than the Lakers, Clippers, Warriors, Knicks, or Nets. More broadly, in general the tax code is very unfavorable to professional athletes who tend to have very high annual earnings but short careers, and so players would be well-advised to take this kind of issue into account.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

TODAY IN SLATE

The World

How Canada’s Shooting Tragedies Have Shaped Its Gun Control Politics

Where Ebola Lives Between Outbreaks

Gunman Killed Inside Canadian Parliament; Soldier Shot at National Monument Dies

Sleater-Kinney Was Once America’s Best Rock Band

Can it be again?

Paul Farmer: Up to 90 Percent of Ebola Patients Should Survive

Is he right?

Science

“I’m Not a Scientist” Is No Excuse

Politicians brag about their ignorance while making ignorant decisions.

Technology

Driving in Circles

The autonomous Google car may never actually happen.

In Praise of 13th Grade: Why a Fifth Year of High School Is a Great Idea 

PowerPoint Is the Worst, and Now It’s the Latest Way to Hack Into Your Computer

  News & Politics
Politics
Oct. 22 2014 9:42 PM Landslide Landrieu Can the Louisiana Democrat use the powers of incumbency to save herself one more time?
  Business
Continuously Operating
Oct. 22 2014 2:38 PM Crack Open an Old One A highly unscientific evaluation of Germany’s oldest breweries.
  Life
Gentleman Scholar
Oct. 22 2014 5:54 PM May I Offer to Sharpen My Friends’ Knives? Or would that be rude?
  Double X
The XX Factor
Oct. 22 2014 4:27 PM Three Ways Your Text Messages Change After You Get Married
  Slate Plus
Tv Club
Oct. 22 2014 5:27 PM The Slate Walking Dead Podcast A spoiler-filled discussion of Episodes 1 and 2.
  Arts
Brow Beat
Oct. 22 2014 10:39 PM Avengers: Age of Ultron Looks Like a Fun, Sprawling, and Extremely Satisfying Sequel
  Technology
Future Tense
Oct. 22 2014 5:33 PM One More Reason Not to Use PowerPoint: It’s The Gateway for a Serious Windows Vulnerability
  Health & Science
Wild Things
Oct. 22 2014 2:42 PM Orcas, Via Drone, for the First Time Ever
  Sports
Sports Nut
Oct. 20 2014 5:09 PM Keepaway, on Three. Ready—Break! On his record-breaking touchdown pass, Peyton Manning couldn’t even leave the celebration to chance.