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Manhattan Moment: High state taxes drive talent away

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The NBA and NHL championship series are underway.

The Miami Heat are defending their title against the San Antonio Spurs in a rematch of last year's finals. The Los Angeles Kings are off to a great start to their final challenge for the Stanley Cup with their exciting overtime win against the New York Rangers.

The NBA matchup showcases two low-tax states (Florida and Texas), while the NHL matchup is between two high-tax states (California and New York). It is remarkable that the Kings and the Rangers can maintain rosters of players strong enough to contend for the Stanley Cup considering the major effect tax rates have on professional athletes' incomes.

Rumors are starting to circulate over whether or not LeBron James will stay with the Miami Heat after the end of the NBA Finals. Looking back three years ago, before the 2010-11 season when James made his infamous “decision” to go to Miami, one can see how economics played a factor. James made $19 million in salary this year, excluding endorsement deals. If he had decided to “take his talents” to other possible suitors (the Los Angeles Clippers or New York Knicks), he would have seen $1 million less in take-home pay this year — just because of higher income taxes.

Accounting for James’s endorsement income of $42 million, his yearly state income tax savings skyrocket to nearly $4 million. This makes staying in South Beach an attractive financial option for King James.

Last summer, star NBA free agent Dwight Howard decided to go to the Houston Rockets rather than remain with the Los Angeles Lakers, even though the Lakers offered him $118 million over 5 years while the Rockets offered $88 million for 4 years. Taking into account the games he will play in other states (which are taxed at those states' rates) and the reality that he would be unlikely to take the 5th year option from the Lakers, Howard is set to earn an additional $7 million in after-tax income over 4 years from his move to income tax-free Texas.

Taxes affect NFL players, too. Because of differences between state income taxes, this year's third pick in the NFL draft is going to make more money after taxes than the second pick, even though the NFL employs a system that determines what each draftee will earn based on his selection order. Greg Robinson, a big offensive tackle out of Auburn, was taken second overall by the St. Louis Rams, and Missouri has a top income tax rate of 6 percent on earnings over $9,000. Quarterback Blake Bortles was taken third overall by the Jacksonville Jaguars, and Florida has no state income tax. Robinson is projected to get $21.3 million over his four-year rookie contract and Bortles is expected to earn $20.7 million. However, when Missouri's income tax is subtracted, Bortles actually comes out ahead of Robinson in after-tax income.

Non-athletes have also noticed the large financial benefit of moving from high-tax states to those without an income tax. On net, between 2000 and 2010, California lost 585,000 residents and $17.2 billion in adjusted gross income to the 9 states that do not have an income tax, according to state migration data compiled by the non-partisan Tax Foundation. Over the same time, New York lost 428,000 residents and $16.2 billion in adjusted gross income to the same nine states.

People respond to economic incentives, and chipping away at their earnings through high state income taxes encourages them to take their talents elsewhere. When possible lifetime tax savings add up to hundreds of thousands of dollars, or millions in the case of star athletes, it eases the pain of packing up and moving.

Jared Meyer is a policy analyst at Economics21 at the Manhattan Institute for Policy Research. You can follow him on Twitter here. A version of this piece originally appeared on Economics21.org.
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