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How Big of an Advantage is "No State Income Tax" for the Rockets?

Discussion in 'Houston Rockets: Game Action & Roster Moves' started by crash5179, Dec 7, 2012.

  1. crash5179

    crash5179 Contributing Member

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    Every summer we here it. Here is a quote from the Chris Ballard article on Daryl Morey where he talks about a hard back book that the Rockets give perspective Free Agents:http://sportsillustrated.cnn.com/vault/article/magazine/MAG1206495/
    So exactly what kind of advantage do the Rockets have because Texas does not have a State Income Tax?

    First of all what is the difference between trying to sign your own free agent when you hold his Bird Rights vs. another team trying to sign him in Free Agency? Per Larry Coon's FAQ http://www.cbafaq.com/salarycap.htm#Q53
    A standard Max Raise is - 4 years with a 4.5% raise.
    A Max Raise with Bird Rights is - 5 years with a 7.5% raise.

    Also per Larry Coon's FAQ http://www.cbafaq.com/salarycap.htm#Q54 Raises are not compounded annually, which basically means if you received a $450,000 raise in year one, that is the same raise you will receive in year 4 or 5.

    What does all that mean in actual dollars and cents for a max free agent in the summer of 2013 like Chris Paul? Chris is in the last year of a contract that pays him $17,779,458.00 this season.

    The Los Angeles Clippers can offer Chris Paul the following 'Larry Bird Exception' five year contract with an annual 7.5% pay raise based on his 2012 / 2013 season salary which comes out $1,333,459 raise in each year:

    First Year - $19,112,917
    Second Year - $20,446,376
    Third Year - $21,779,835
    Fourth Year - $23,113,294
    Fifth Year - $24,446,753

    The Houston Rockets can offer Chris Paul the 'Standard' four year contract with an annual 4.5% raise based on his 2012 / 2013 salary which comes out to a $800,076 raise in each year:

    First Year - $18,579,534
    Second Year - $19,379,580
    Third Year - $20,179,626
    Fourth Year - $20,979,672

    Thats a pretty substantial difference. In the fourth year alone Chris Paul would make $2,133,622 less by signing in Houston! That is a significant amount, especially considering that the Rockets can't offer a fifth year. Assuming Chris Paul can overlook the lack of a fifth year, the total difference Houston ($79,118,367 four year contract) can offer verses what Los Angeles ($84,452,422 over 1st four years of the contract) can offer is $5,334,055 in favor of the L.A. Clippers. In reference to Chris Ballard's piece on Daryl Morey, that's a lot of 60-inch LED TVs.

    Will "No State Income Tax" Really Make That Big Of A Difference?

    To answer that question we need to know what the state income tax for a particular state is. Since Chris Paul is the example in this scenario we will use California's state income tax rate for wage earners over $1,000,001 http://swz.salary.com/salarywizard/layouthtmls/swzl_statetaxrate_ca.html which is 10.3%. My first thought when I read that was "Damn! God does not charge that much in tithing to get into heaven!" (I apologize in advance for my religiously insensitive joke)

    Here is Chris Paul's annual salary from the L.A. Clippers adjusted for the California State Income Tax of 10.3%.

    First Year - $19,112,917 - $1,968,630 = $17,144,287
    Second Year - $20,446,376 - $2,105,977 = $18,340,399
    Third Year - $21,779,835 - $2,243,323 = $19,536,515
    Fourth Year - $23,113,294 - $2,380,669 = $20,732,625
    Fifth Year - $24,446,753 - $2,518,016 = $21,928,737

    Now here is the difference between what the Rockets could offer minus what the Clippers could offer with the salary adjusted with the California State Income Tax.

    First Year - $18,579,534 - $17,144,287 = $1,435,247
    Second Year - $19,379,580 - $18,340,399 = $1,039,181
    Third Year - $20,179,626 - $19,536,515 = $643,111
    Fourth Year - $20,979,672 - $20,732,625 = $247,047

    Over the course of four years, even given the fact that the Clippers can offer a 7.5% annual raise vs the Rockets little 4.5% annual raise, the Houston Rockets can offer Chris Paul 3.365 million dollars more than the Clippers over the course of four years. That's a lot of 60-inch LED TV's.

    Of course there is the matter of the fifth year that the Rockets can not offer. Certainly I would think the importance of the fifth year would very from player to player, mostly depending on their age and health. Chris Paul is 27, Dwight Howard is 26, Andrew Bynum is 25 so providing all of those players make it thru their next contract reasonably healthy they could each have one more big pay-day. Of course each of those players listed has had their own injury issues so the fifth year could be important to each of them.

    What Part Does Ego Play In A Players Decision?

    Is it more important for a player to walk into a room of other NBA players and say, "I make 21 million" even though his net salary is only 18 million or to make only 20 million with not income tax? Is there a status in the NBA attached to Gross Income that you don't get with Net Income? I don't know but for some reason I thought it was worth asking.

    In the end there is a big difference... or is there?

    The Jock Tax!!

    This is one of those little state tax rules that forces a player to pay state income tax for every duty day spent in their state. There are currently eight teams that reside in states that do not require a 'Jock Tax': Rockets, Spurs, Mavericks, Grizzlies, Raptors, Wizards, Heat and Magic. There are 41 road games 10 of which are against the teams listed which leaves 31 games (duty days) a year that a player on the Houston Rockets is charged a 'Jock Tax'. That's 37% of each players salary! Just when it looked like the 'No State Income Tax' was an advantage.

    I am no Tax Expert so my numbers are almost certainly off. Plus I'm guessing not all states have a State Income Tax rate equal to California's but as an example I'm going to use California's rate across the board. So, I'm taking 37% of the salary in the Chris Paul example for the Rockets and adjust for the 10.3% tax rate.

    First Year - $18,579,534 * .37 = $6,874,428 * .103 = $708,066
    Second Year - $19,379,580 * .37 = $7,170,444 * .103 = $738,556
    Third Year - $20,179,626 * .37 = $7,466,462 * .103 = $769,046
    Fourth Year - $20,979,672 * .37 = $7,762,479 * .103 = $799,535

    Estimated annual State Income Tax due to the dreaded 'Jock Tax' is $3,015,203 over the course of the four year contract for Chris Paul with the Houston Rockets. The difference before the 'Jock Tax' was figured into the equation was 3.365 million dollars in favor of Houston.

    With the 'Jock Tax' figured in, Houston can offer Chris Paul an estimated net gain of .35 million dollars more a year.

    So there you have it. $350,000 dollars is it. That doesn't buy near as many 60-inch LED TV's as 3.5 million thats for sure. Certainly $350,000 dollars is nothing to sneeze at but in the world of NBA Stars that are making 19 to 20 million a year plus endorsements, I'm guessing thats not going to be the deciding factor in with who a player choses to sign a contract with.

    On a more positive note, if the Rockets were competing on even footing with another team that was only able to offer a 'Standard' four year contract with 4.5% pay raises then I think living in a non-State Income Tax State would mean a lot more and might actually play heavily into a players decision on what team he ends up signing with. But in the case of players like Dwight Howard or Chris Paul, it's just going to come down to where they want to play and not who can offer the most money.

    Conclusion: No State Income Tax provides no real advantage when trying to sign a player away from a team that controls his 'Larry Bird Rights' but does provide a significant advantage when both teams can only offer a 'Standard Contract'.
     
    #1 crash5179, Dec 7, 2012
    Last edited: Dec 7, 2012
    8 people like this.
  2. Ricksmith

    Ricksmith Contributing Member

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    Fantastic post, even if the numbers are slightly off. I've always wondered about what kind of advantage the lack of state tax can make, but it's so hard to figure out due to the tax paid in every city they play in that has state tax, or even city tax.
     
  3. TheRookets

    TheRookets Rookie

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    More money for strip clubs = happiness.
     
  4. infinitidoug

    infinitidoug Member

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    If Harden is really actively recruiting superstars, he should use this as one of his selling points. As a person that lives in California, the state's income taxes are a HUGE pain. ugh...
     
  5. MadMax

    MadMax Contributing Member

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    From experience, it's overstated. I heard it used to justify free agent bids for all Houston sports teams...and it hasn't been nearly as persuasive as we're often led to believe it is.
     
  6. heypartner

    heypartner Contributing Member

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    crash's section above about The Jock tax is the key here. Players still get taxed.
     
  7. Joe Joe

    Joe Joe Go Stros!
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    I think the state sales tax only comes into play after the glamour cities/ super star allure. Houston will fare well with free agents against teams not in NY/LA/Chi and wherever Lebron is playing. All those teams are in luxury tax zone so the Rockets aren't in that bad a position.

    I am assuming those cities keep their super star free agents.
     
  8. jvu

    jvu Member

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    Chris Paul
    James harden
    Chandler Parsons
    Kevin love
    Dwite Howard

    Season tikzzzz me want
     
  9. Ziggy

    Ziggy QUEEN ANON

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    You can't just purchase a home in Texas and declare it your residence I guess?
     
  10. Air Langhi

    Air Langhi Contributing Member

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    You still have to pay tax in all the cities you play.

    I think it is way over rated. I am sure lebron went to miami because it has no income tax. I guess dwight was OK with paying taxes if he had a chance to win.

    I think most top players want to win.
     
  11. JayGoogle

    JayGoogle Member

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    Overrated.

    I think the opportunity to win and play with other great players is the biggest factor of them all.
     
  12. Alex L.

    Alex L. Contributing Member

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    Whatever state income tax they save won't cover their loss in endorsement deals.
     
  13. da_juice

    da_juice Member

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    Yeah, I'm sure guys like Lebron and Dwight aren't sitting around lamenting having a state income tax. Most of that can be offset by endorsements anyway.
     
  14. juicystream

    juicystream Contributing Member

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    State income taxes are also deductible, so the real rate decreases.

    For instance in Georgia, the real tax rate of 35% Fed and 6% GA is 38.8% rather than 41%. For those who have difficulty, what appears to be a 6% difference between GA & TX on the surface is really only a 3.8% difference.

    Every state is different when it come to taxes. Illinois is basically a flat 3%, IIRC. California is a lot harsher than just the rates, they disallow a lot more deductions compared to other states.

    Marketing dollars are far more important for the NBA than state income taxes. I've always found it surprising that the standard of living is never mentioned. Houston area is way cheaper than the LA area, not that you have to actually live where you play, but most players do, at least during the season.
     
  15. cheke64

    cheke64 Member

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    Thank you. So many stars passed up on us and by miracle Harden landed on our laps. Now we think we stars are drooling to get here? Gtfo!

    All this paid article is doing is prepping for future stars to consider us.
     
  16. cheke64

    cheke64 Member

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    Just a better excuse for our GM to say, "hey, our contract is not as high the other one but with state ...... youll make the same"
     
  17. kaleidosky

    kaleidosky Your Tweety Bird dance just cost us a run

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    Shouldn't there be a Jock Tax if he's on LA? Playing 41 games on the road from there? So wouldn't that negate the final subtraction you made?
     
  18. Relativist

    Relativist Contributing Member

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    Aren't state income taxes recaptured by the Alternative Minimum Tax which presumably all NBA players would be affected by?

    Regardless, the main point is that the allure of 'no state income tax' isn't what it's hyped up to be.
     
  19. juicystream

    juicystream Contributing Member

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    It is added back for AMT, but most NBA players probably wouldn't be subject to it. This is due to most of their income being taxed at 35%, their regular taxes ends up being higher than what the AMT would be (28% of your adjusted taxable income).
     
  20. juicystream

    juicystream Contributing Member

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    No. While the jock tax would apply, you receive a credit for the tax paid to other states state through reciprocity.

    So his California income tax would be decreased by the so called jock taxes paid to the other states.
     

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