It seems that Dwight Howard will make $2 million more from the Houston Rockets than he could from the max deal with Los Angeles due to California’s high tax burden, and Texas’s lack of an income tax:
If he claims California as his primary residence and stays with the Lakers, Howard will gross $118 million off a five-year max contract, but will net only $59.6 million, according to Robert Raiola, a certified public accountant with FMRTL in Cranford, N.J., whose clients include athletes.
That’s because California has the highest state income tax in the U.S. Any person who is single — Howard is not married — earning more than $1 million in the state pays a top rate tax of 13.3 percent.
Howard could get only a four-year max deal by going somewhere else and would make $1.7 million less per season, but could still come out on top if he signs with the Houston Rockets or Dallas Mavericks and makes his home in Texas, a state that has no income tax.
Over a four-year period, Howard would gross $94.4 million off a contract with the Lakers and $87.6 million from a contract with an NBA team in Texas, but Raiola says the difference in the state income tax between California and Texas would result in Howard netting $2.6 million more from a Texas-based team. That’s even including jock taxes, which are the taxes Howard would have to pay states when he plays on the road.
I recall similar numbers with respect to LeBron James’s decision to sign with Miami (no income tax in Florida) over Cleveland or New York (high income tax).
But as Tony Nitti has noted in Forbes, this picture looks a lot different once the tax man cometh: “Howard would pay nearly $12 million in California tax over the four years if he signs with the Lakers, but only $600,000 in state tax should he sign with Houston. This means that a four-year deal with Houston would actually yield an additional $8 million in after-tax income.”
California has the highest top rate for personal income in the nation, while Texas has no state income tax. The difference is even greater if cost-of-living is taken into account: California’s is the fourth-highest in the nation, while Texas’s is the second-lowest.
Should Mr. Howard sign with the Rockets, the Lakers may be just another casualty of California’s hostile business environment. What was the team’s largest draw may become, due to the state’s punitive tax policies, an additional liability. As Rick Perry put it in a recent radio ad: “I’ve heard building a business in California is next to impossible.” Dwight Howard may soon be a seven-foot poster-child for why.