Stimulus, The Beatles and LeBron

““On a five-year contract worth $96 million — what he’d get from the Knicks or the Heat — LeBron would pay $12.34 million in New York taxes.” Florida has no state income tax.” – Business and Media Institute (8 July 2010).

The circus has ended and the clowns can stop clogging Twitter. NBA Superstar and Twitter Phenom, Lebron James has signed with Miami and Cleveland can continue to be Cleveland. Fans of Lebron from his boyhood home in Akron feel betrayed. Speculators in Miami are looking forward to selling off the season tickets they bought five days ago for high multiples of the prices they paid.

Lebron will join two of the finest players in the game in Miami. The Heat retained Dwayne Wade and signed Chris Bosh. Pat Riley, the famous former Head Coach who won titles with Magic Johnson, James Worthy and Kareem, will return to the bench just to be part of the spectacle. LeBron can hardly be blamed for wanting a piece of that action.

On the surface, it looks like Lebron took a financial haircut uglier than that of Tyler Durden in the Movie Fight Club. The Miami Heat will pay $96 million over five years for his services. His former team, the Cleveland Cavaliers, could have set him up with a cool $125M. To complete the picture, understand that James will rake about $20M per year in advertising regardless of which team he joins. He, like Michael Jordan, has wisely cultivated enough of an image so that he makes significant money independent of what he actually gets paid to play ball.

Thus, when we talk state taxes, the business sense LeBron displays off the court becomes way more impressive. The teams competing with Miami to sign LeBron, all represent states with significantly higher state income taxes. While money can’t completely drive the decision making of a man who will never have to work for subsistence again in his life, it certainly helped make Miami look all the more impressive. The Business and Media Institute put together the numbers on what LeBron would have paid in state and local income taxes to play in Miami, New York, New Jersey and Cleveland. Estimates for taxes on $96M follow below.

New Jersey and Ohio, the other reported frontrunners to attract James, also have state income taxes, but they are not as his as in New York. Based on a $96 million contract, James would pay $5.69 million in state taxes if he re-signed with the Cleveland Cavaliers. If he signed with the New Jersey Nets, James would pay $10.32 million in state taxes.

Using estimated offers and including LeBron’s outside earnings as well, we can reconstruct what LeBron’s accountants and he discussed. We assume Miami, New York, and New Jersey all three offer LeBron $96M.

Based on these figures, we back out that Mr. James would pay a tax of 6.21% in Cleveland, 10.75% in New Jersay, and 12.85% in New York. The table below shows the impact of this taxation on LeBron’s business decision.

Team salary($M)Advertising Income($M)LeBron’s Swag($M)Tax RateState Tax($M)LeBron’s Take-home (Before IRS)($M)

To get a sense of what happened here, imagine you were LeBron James Incorporated, and built motorcycles instead of playing ball. Given the differential tax regimes in the four states examined, ceteris paribus, where do you set up shop? Obviously, Florida wins. Their climate is more conducive to business; therefore, unless Cleveland, New Jersey or New York offers a major incentive to balance that tax differential out, the firm and the employees are going to Florida.

Given that under the Michael Jordan Rule, Cleveland could offer James a $3M per season more to hang around Cleveland in February, we can deduce that LeBron’s suffering costs a bit more than $15M over 5 years. Perhaps DeLonte “Well Howdy there, Miz James” West had something to do with LeBron’s decision for reasons that we would prefer not to link at our dignified and genteel family blog. However, LeBron James would hardly be the first superstar to walk on a deal because of tax concerns.

George Harrison famously excoriated Great Britain’s top tax rate in The Beatles song “Taxman.” Bjorn Borg felt considerably less Swedish for a while over the top bracket in his homeland. High taxes cause productive members of society, and firms they direct or work for, to leave high tax jurisdictions all the time.

It’s a good thing to keep in mind next year when the tax rebates from the stimulus end and the Bush Tax Cuts expire within the next calendar year. Low taxes are a form of stimulus. Higher taxes increase the gummed-up financial viscosity of an over-governed state. As Great Britain learned with the Beatles, a 95% tax on the income of an expatriate nets $0.00.