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State income taxes on NBA salaries can cut players’ net pay by millions of dollars and affect a team’s ability to land a star competitor. But this year’s star free agents aren’t necessarily picking their new homes based on their potential tax bills.
In fact, the star of this year’s free agent class, Gordon Hayward, picked Boston—where state income taxes on millionaires may rise soon—instead of Miami, where there is no state income tax. Chris Paul, meanwhile, sought a trade to Texas from California, exchanging one of the nation’s highest income tax rates for a zero-dollar one.
Despite potentially costing them millions, taxes aren’t the top consideration for most players switching teams. Hayward will pay an average of $1.63 million a year in Massachusetts state income tax, a bill he would have avoided if he had relocated to Florida. However, he was drawn to reunite with his college coach Brad Stevens in Boston.
Kevin Durant moved last year from the Oklahoma Thunder to the California Golden State Warriors, and David West opted out of a deal with the Indiana Pacers to play for Golden State. Both left states with lower income tax rates for the one with the highest rate.
West and Durant took home less money last season but won a championship in the highest tax jurisdiction, Sean Packard, tax director at the McLean, Va.-based sports agency Octagon Financial Services, told Bloomberg BNA in an email.
“There are many factors that come into play,” he said. “Each player has different preferences. Some want to win at all costs. Some want the highest gross. Some want the highest net (after tax). Some want to live in a community where their family will thrive. Some want to play in a certain system.”
Hayward, a small forward who called Utah home for the past seven years, announced July 4 he would ink a four-year, $128 million deal with the Boston Celtics.
Hayward was rumored to sign a large contract with either the Celtics or the Miami Heat in his free agency pursuit. which began on July 1. The decision to move to Massachusetts—a state with a 5.1 percent income tax—versus Florida—a state with no income tax—will inevitably cost Hayward millions.
Massachusetts voters next year will consider a “Millionaires Tax,” which would impose a 4 percent surtax on individuals making more than $1 million a year. Though the surtax wouldn’t take effect until 2019, it would still hit Hayward—who is contracted by the Boston Celtics through the 2020-2021 NBA season—for an additional $1.24 million a year.
Hayward previously held a four-year, $63 million contract with the Utah Jazz and was subject to a 5 percent state income tax, paying an average of $787,067 a year.
“While Gordon Hayward would pay income taxes to states in which he plays in any circumstance, he would have experienced a significantly lower tax bill in Miami, or even if he remained in Utah,” Jared Walczak, a policy analyst at the Washington-based Tax Foundation, told Bloomberg BNA in an email. “Ultimately, he and his agent apparently saw Boston as the best option despite the higher tax burden, but there’s no question that they took tax costs into account while weighing the options.”
Point guard Chris Paul may save more than $3 million next year by moving to Texas to play for the Houston Rockets in a trade made just before the window opened for free agency. Texas has no income tax; Paul’s former team, the Clippers, resides in California where the rate is 13.3 percent.
“Teams in no-tax states will undercut their competition and use presentations to show how the player will net more with less gross money,” Packard said.
“We usually run the numbers in advance anyway, but the teams know it’s an advantage they can use,” he added.
Professional athletes also face so-called jock taxes, requiring them to pay income tax in cities and states in which they might only play one game. Even a bill passed June 20 by the U.S. House of Representatives, the Mobile Workforce State Income Tax Simplification Act ( H.R. 1393), which would limit the ability of states to tax out-of-state residents who work within their borders for 30 days or less during they year, wouldn’t apply to professional athletes.
The National Basketball Association’s free-agent season began July 1.
Teams in states such as Florida and Texas, which don’t have an income tax, may have an advantage luring players, at least as far as taxes go.
“Few will shed a tear for a well-compensated professional athlete with significant state tax exposure,” Walczak said. “But it’s worth bearing in mind that the complexities and incentive structure they face applies to many other people as well, many of them far less equipped to deal with the costs.”
Higher-income individuals tend to be more mobile but also better equipped to engage in sophisticated tax planning, which is one reason why state efforts to substantially increase taxes on the wealthy often fall short of expectations, Walczak added.
“A middle-income wage earner only has so much capacity to pick up and move if tax rates inch higher, but someone wealthier—and particularly a wealthy retiree—might be able to move to a more favorable tax climate, or at least restructure their economic activity to expose less of it to a given state’s taxes,” he said.
Minor league ballplayers face significant administrative and tax costs on relatively meager salaries. And many regular taxpayers also have to deal with multiple state tax regimes, without the salary or professional support that comes with a pro deal, he said.
To contact the editor responsible for this story: Ryan C. Tuck at firstname.lastname@example.org
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