Damian Lillard has named the Miami Heat as his preferred trade destination for several reasons. Among those, presumably, are financial prospects caused by tax differences in Florida and Oregon. If Lillard doesn’t have direct incentive to join Miami, he’s certainly going to get paid handsomely for it without altering his contract a bit. This adds an interesting wrinkle in the competitive tapestry of the NBA. Let’s explore it in this edition of the Blazer’s Edge Mailbag.
You keep mentioning money as a motivation for Dame to go to Miami because of the tax rate? It can’t be that big of a factor compared to loyalty and happiness, right? These guys make millions of dollars already. You’re telling me a small percentage makes that much difference? That doesn’t connect with me. If that’s what it’s about, why should I watch with my normal salary or buy tickets? I can afford it and they can’t?
We’re conflating a few things here, but let’s sort it out.
Once upon a time I didn’t think that tax rate made that much of a difference either. Dismissing it is partially justified. Players suit up for all 30 franchises, regardless of state (or national) finances. Endorsement dollars can obliterate tax gaps too. Whatever Nike pays LeBron James for suiting up for the Lakers is far more significant than the tax difference between L.A. and Milwaukee.
In cases like Lillard’s tax rate can make a huge difference, though. You’ve mentioned one of the reasons why: scale.
As I always say when discussing these things, I am no expert. I have heard that Oregon’s state tax rate weighs in at a hefty 9.9%. Florida has no state income tax.
If you’re making $50,000 per year, the difference is $5,000. That’s annoying, but a small price to pay to hang with Portland hipsters instead of Florida Man.
Damian Lillard is scheduled to make $210 million over the remainder of his contract. The difference between Oregon and Florida for him is $21 million. That’s life-changing money to everybody on the planet, including Dame. He may be an NBA superstar, but if you can remember 2012, so can he. Back then, that $21 million would have been a fortune. It’s $7 million more than he made the first five years of his career, combined.
Given the overall scope of Lillard’s contract, the marginal tax burden might be bearable if things were going right in Portland. If the Blazers were contending for titles and Lillard was finding professional fulfillment here, we wouldn’t be having this conversation.
Those things aren’t happening. There’s no way Dame can guarantee the happiness part in Miami, but he probably figures if he’s going to suit up, he might as well do it for a team making runs at the NBA Finals while getting paid several million more dollars for doing so. If that’s not happiness, it’s close enough.
Obviously, this creates a subtle—or sometimes not so subtle—competitive disadvantage for franchises in states with high income tax rates.
Personally, I’m surprised the league hasn’t looked at this more. Portland isn’t the only high-tax state in the league. New York, California, Minnesota, and Massachusetts rank up there. Players keep far less of their salaries in those places than in Florida or Texas.
Obviously lower-income-tax states make up for their discount rates in other ways. Those taxes (usually sales and property) are at least somewhat voluntary. You can choose what to purchase; you can’t choose your income. That’s going to make Miami, Orlando, Dallas, Houston, and San Antonio attractive destinations, especially for higher-paid players.
Restoring balance wouldn’t be that difficult. The league could create a State Tax Offset fund to smooth out the tax rate gap. Basically, they’d need to find the percentage rate of overall NBA player income that would cover the aggregate state taxes owed by all players. Each salary would be “taxed” by the league at that percentage. (If the rate was 5% and you made $1 million, you’d pay $50,000 into the State Tax Offset no matter what state you played in.) The money would accumulate in escrow and be distributed back to the players at the end of the year, proportionate to their state tax rate. Players in Florida and Texas would get none of it, as they are taxed at a 0% rate. Players in Oregon making $1 million would receive $100,000, while players in California would get $130,300 based on their state tax rate.
Obviously I’m making up that 5% State Tax Offset rate. I haven’t done the calculations to determine the actual percentage needed. But look what happens when it’s enacted.
Assuming a 5% STO rate...
- If Damian Lillard goes to Miami, he pays $50,000 per million in State Tax Offset, receiving nothing in return (no state income tax in Florida) making his net loss $50,000 per million.
- If Lillard stays in Portland, he pays $50,000 per million into the State Tax Offset, receives back $100,000 per million to cover his state taxes (he’s now up $50,000 per million), then pays $100,000 per million in actual state taxes (Oregon’s tax rate). That leaves him down $50,000 per million, the same as he would have been in Miami.
- This contrasts with the current system in which Oregon Lillard would lose $100,000 per million while Florida Lillard would lose $0 per million...bringing a whole new definition to his uniform number.
Exemptions and such would cause wrinkles, but we don’t need to get the actual tax payments 100% accurate to the penny. We just need to smooth out the vast differences between some franchises and others...franchises that become secondary marquee destinations, not because of their track record or potential for huge exposure, but simply because players receive a financial windfall for playing there.
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