Did saving $25 million in taxes fuel LeBron James' Miami Heat pick?
Under the National Basketball Association (NBA) rules, there is a salary cap subject to a complicated set of rules and exceptions. The actual cap changes from year to year based on a number of factors, including the amount of revenue generated by the NBA in the prior year. For the 2010-2011 season, the cap is $58,044,000.
The whole idea behind the cap is to restrict the amount of money that teams in bigger markets (think New York and Los Angeles) can spend on players without paying a luxury tax. The result is that the playing field for teams in smaller markets (think Minnesota and Portland) is made relatively level.I won't profess to know the complicated rules and exceptions which lead to last minute sign and trades in the NBA. But what was obvious after the Heat signed Wade and Bosh was that it was likely there was not enough space under the cap to sign James at the maximum salary allowable without some significant maneuvering. Reportedly, unless the Heat cleared their rosters, each of the three players would sign for less than the maximum and "lose" about $7 million over the next five years. If James had gone to the New York Knicks, the team actively wooing James for nearly two years, he would have been able to sign for more money. The Knicks had done a little housecleaning, and even with the addition of Amar'e Stoudemire, had almost $19 million to spend on James.
But James, it appears, had done his homework on the tax implications.
In addition to the basketball reasons for signing with the Heat, James is going to walk away from this deal with less money in his contract but more money in his pocket. This is because Florida offers a number of tax advantages over New York -- a fact that hasn't gone unnoticed in the tax world.
Assuming that James took just under $17 million from the Heat (which is probably pretty close to accurate), he would pay no state income tax, leaving him with the same $17 million. If he had gone to New York, even if he nabbed an additional $1.5 million (as the salary difference has been speculated), he would shell out close to $1.7 million in New York state taxes. That doesn't count James' endorsements with companies like Nike, Sprint and McDonald's. Those deals are said to bring in $40 million per year for James, landing him at #19 on the Forbes list of the 100 most powerful celebrities of 2009 (just behind his idol, Michael Jordan).
The total bill? Over five years, that means James could save more than $25 million in state taxes alone by relocating to Miami over New York. And that doesn't count other taxes such as local taxes (New York has a bunch) or property taxes (on average, New Yorkers pay a bigger percentage of their income for property taxes than Floridians). In fact, overall, Florida has a fairly attractive tax picture. Compared to other states, it is ranked by the Tax Foundation as 47th in terms of state and local tax burdens; New York, on the other hand, is 2nd (just behind New Jersey, the home of the Nets, also desperate to sign James).
Is the lure of lower taxes enough to have convinced James to make the switch? Not on its own: James is too smart for that. But you can bet it figured into the equation. He would not be the first mega-star lured down to Florida for tax reasons. Prior to his legal and marital woes, Tiger Woods was said to have relocated from California to Florida primarily in order to save on taxes.
I'm sure over the next few days we'll be bombarded with more articles trying to figure out why James did it -- especially in light of this explosive letter from the owner of his soon to be former team. Only James himself knows the real reason for the move. Fame, championship rings, sun ... could be. But don't rule out the money.
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