Taxes and the (Sporting) Rich

The core principles of a well designed tax system are to 1) raise the dollars that are intended 2) not drive non-economic behavior.  In the case of state taxes, there is an additional difficulty because high-income earners can often choose where they want to live and state tax rates are one of the few items that they are under their control, all else being equal.  For example, it is no accident that the hedge fund industry sprung up in (relatively) lower tax Connecticut than in brutally high New York City (which has both city and state taxes at incomes that are progressive and rise with your income), and now that income has permanently migrated away from NYC.

For sports figures, there are two elements to taxes; if you are on the road you have to pay taxes in all of the cities you visit at local rates.  These dollars are collected and I’m sure all the major sports leagues have processes to ensure that this occurs (through withholding).  Athletes are high profile individuals and they will be spotted if they don’t comply with a policy that is otherwise observed only in the breach (the fact that if you spend more than a few days in a state you need to pay taxes on the apportioned days at local rates).

Thus half of your taxes as a sports star depend on the cities you visit and half depend on your “local” city.  Beyond that, any endorsement income you earn (which is a much greater component for many athletes) is taxed at your “home” rate.  It is no accident that Tiger lives in Florida where there is no state income tax.  He would have been insane to set up shop somewhere like NYC.

This article in the WSJ is titled “LeBron’s Tax Holiday” and it describes the tax benefits from living in Florida compared to other states.  While there is tax information in the article I am choosing just to use the excellent resources at The Tax Foundation where on this page you can see rates by state.

– Ohio 5.925% on all income beyond $200k
– New York State is 7.85% on all income beyond $200k plus 1.7% for NYC and it gets complicated… so let’s just say the burden is beyond 10%
– New Jersey 8.97% on all income beyond $500k
– now if he chose to be like the hedge fund people and live in Connecticut (hard to believe, but more efficient from a tax perspective) he’d be taxed at 6.5% above $500k (but he would still pay taxes at NYC rates at all home games so he’d only be better off for endorsement income)
– California 10.55% on all income beyond $1M
– Illinois 3% (NOTE this is one of the FEW things that Illinois does correctly, and our legislature seems committed to raising this rate since we now have the worst credit rating in the nation)
– Florida has NO state income taxes

If you took the “advanced” class you might want to locate yourself in a state with low taxes and then near a conference with other states that had local taxes; perhaps a league heavy in Texas cities and Florida cities would compete for the tax-savviest athletes.  Stay out of NYC and NJ and ALWAYS California.  This would give you the “home” bonus and also the “road” bonus.

This could have been a “teaching opportunity” on the effect of high taxes (that are controllable, Federal taxes are inescapable) but it was mostly lost in other elements of the public spectacle.

Cross posted at LITGM