Did Taxes Push Dwight Howard to Houston?

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

Politics

Blacks Don’t Have a Corporal Punishment Problem

Americans do. But when blacks exhibit the same behaviors as others, it becomes part of a greater black pathology. 

I Bought the Huge iPhone. I’m Already Thinking of Returning It.

Scotland Is Just the Beginning. Expect More Political Earthquakes in Europe.

Lifetime Didn’t Think the Steubenville Rape Case Was Dramatic Enough

So they added a little self-immolation.

Two Damn Good, Very Different Movies About Soldiers Returning From War

Medical Examiner

The Most Terrifying Thing About Ebola 

The disease threatens humanity by preying on humanity.

Students Aren’t Going to College Football Games as Much Anymore, and Schools Are Getting Worried

The Good Wife Is Cynical, Thrilling, and Grown-Up. It’s Also TV’s Best Drama.

  News & Politics
Weigel
Sept. 19 2014 9:15 PM Chris Christie, Better Than Ever
  Business
Moneybox
Sept. 19 2014 6:35 PM Pabst Blue Ribbon is Being Sold to the Russians, Was So Over Anyway
  Life
Inside Higher Ed
Sept. 19 2014 1:34 PM Empty Seats, Fewer Donors? College football isn’t attracting the audience it used to.
  Double X
The XX Factor
Sept. 19 2014 4:58 PM Steubenville Gets the Lifetime Treatment (And a Cheerleader Erupts Into Flames)
  Slate Plus
Slate Picks
Sept. 19 2014 12:00 PM What Happened at Slate This Week? The Slatest editor tells us to read well-informed skepticism, media criticism, and more.
  Arts
Brow Beat
Sept. 19 2014 4:48 PM You Should Be Listening to Sbtrkt
  Technology
Future Tense
Sept. 19 2014 6:31 PM The One Big Problem With the Enormous New iPhone
  Health & Science
Medical Examiner
Sept. 19 2014 5:09 PM Did America Get Fat by Drinking Diet Soda?   A high-profile study points the finger at artificial sweeteners.
  Sports
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.