Did NBA star D-Howard leave the Lakers to avoid California tax rates?

Over the weekend, Los Angeles Lakers basketball star center, Dwight Howard announced that he would be leaving the Lakers franchise in favor of the Houston Rockets.

There are good reasons to sign with the Rockets organization.  They have a young and talented team that fared well in the playoffs during the past season.  But the L.A. Lakers have Kobe Bryant and more money to spend than any other team.  And they’re in L.A.  Certainly, Howard didn’t like L.A.’s management or current coaching staff, but he was in one of the world’s largest market with no limit on the amount of money he could potentially make.  Yet he still chose to leave. 

Much has been made of the fact that under NBA rules, the franchise a player is already with can offer a larger financial contract than unrelated franchises looking to pick-up free agents can.  Specifically, the Lakers were prepared to give Howard a max contract of five years for $118 Million, while the max contract that he will receive with the Rockets is $88 Million over four years.  Thus, in NBA parlance, Howard has decided to take a $30 Million dollar cut to sign with the team from Texas.  Howard himself has said, he is “betting $30 Million” on Houston. 

But what is interesting is that Howard will receive MORE money under the $88M contract than he would have received under the $118M contract.  Should Howard decide to domicile in Texas, where he will pay his income taxes, he will be paying Texas income tax rates rather than California rates. 

In California, a high income earner like Dwight Howard will get hit with a 13.3% state income tax rate.  Whereas his state income tax rate in Texas will be 0.0%.  A few other factors need to be considered in evaluating an NBA player’s taxes.  NBA tax rates include “duty days” which essentially factors in income tax for “away” games played outside of the domicile state.  Additionally, the fifth year of the Lakers contract should be ignored since Howard would have had the contractual right to opt-out of his fifth year in favor of another four-year contract.  With the former two factors considered, the Lakers were only offering Howard $3Million more than Houston.

But in taking all of these factors into account, Howard will pay millions less playing in Texas than he would have in California.  Actually, he will end up paying about $2Million less per year in Texas than he would have in California.  That is $8Million dollars total. 

It is difficult to imagine that Dwight’s team didn’t let him know that he would be taking home more money in TX than CA.  In the end, for a myriad of reasons, Dwight signed with a Texas team.  I wonder how many business[wo]men, corporations and organizations are doing similar cost/benefit analysis’s.  The LA Lakers just watched the next three-four years of their basketball life walk away and their state did nothing to help it retain that business in state.  Though LA ticket sales are unlikely to take a hit, accessories, memorabilia and clothing sales will not begin to amount to what they could have been.  High taxes may bring a short term gain to a government, but they are a long term drain on an economy.

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