How Tax Policies Determine Winners and Losers in the NBA
On Sunday night, the Dallas Mavericks celebrated their first NBA championship. In winning the championship, the Mavs displayed clutch shooting, shrewd coaching, unwavering confidence in each other, and thrilling performances from their best player, Dirk Nowitzki.
But the Mavs, and several of the other top teams in pro basketball, have another advantage that most fans never consider.
After all, the advantage isn’t created in the weight room or on the practice courts. It’s gained in buildings that most players will never visit, in cities that are often hundreds of miles from where the teams play.
The advantage is a result of state and local tax policies which allow players in low taxed areas to keep millions more of the dollars they earn in their pockets, rather than paying them out in taxes.
The Mavs home state of Texas has no state income tax. This gives the Mavs – and other teams in income tax free states like Florida and Tennessee – a distinct advantage in attracting key free agents and keeping existing talented players.
The NBA operates under a salary cap that not only limits the total amount a team can spend on the combined salaries of all players, but also places a ceiling on the amount that individual players can earn. As a result, top players with similar years of service in the league make roughly the same salary regardless where they play.
Since the maximum salary available to an elite level player varies little from one team to the next, state and local income tax rates play the greatest role in determining the difference in how much money star players ultimately pocket from team to team.
When LeBron James famously ditched the Cleveland Cavaliers for the Miami Heat last summer, it was estimated that he would save $25 million in state taxes over the next five years by playing in income tax free Florida rather than Cleveland, where combined city and state income taxes approach 8%.
While the Miami Heat are the most notable example of a team in a low tax state reaping the benefits of their comparative economic advantage over high tax states like Ohio, California, New York and Oregon on the court, they are certainly not alone.
There is a clear pattern of talented players migrating to, or staying with, teams in states with little or no personal income tax. Since they can more easily attract and keep better players, teams in states with lower taxes have consistently performed better on the court than teams in highly taxed states in recent seasons.
Over the past seven years, teams based in the 10 lowest taxed cities in the NBA reached the NBA Finals seven times, winning four championships (Dallas, Miami and San Antonio, twice). In contrast, only three times did one of the 10 teams that play in the NBA markets with the highest income tax burdens reach the Finals.
The trend continued this season when seven of the teams located in the NBA’s 10 lowest taxed cities made the playoffs. This year’s playoffs featured only three teams in the 10 highest taxed NBA cities.
During the 2010-11 NBA season, the 10 teams playing in the cities with the lowest income tax burden averaged a stout 57.8% winning percentage. The 10 teams playing in the cities with the highest income tax burden combined for a paltry 39.3% winning percentage.
Tax Rates and 2010-11 Regular Season Winning Percentages of the Teams in the 10 Lowest Taxed NBA Cities
* While Ontario’s income tax rate is higher than the state income tax rate of any state with an NBA team, Canada’s top federal income tax rate is 29% – considerably less than the top tax bracket in the U.S., which weighs in at 35%. When federal tax rates are included, Toronto’s income tax ranks as the 13th lowest of all NBA cities.
Tax Rates and 2010-11 Regular Season Winning Percentages of the Teams in the 10 Highest Taxed NBA Cities
Last year, Nowitzki, the NBA Finals Most Valuable Player and a future Hall of Famer, had the opportunity to leave Dallas for other teams, including the New York Knicks. When he signed his most recent contract, Nowitzki was eligible for a "maximum contract." For players with a decade or more service in the NBA, the max contract is capped at 35% of the league-mandated salary cap. For Nowitzki, that translated to a salary of approximately $17.3 million this year.
Nowitzki opted to remain in Dallas, where he paid nothing in state income tax. If he instead chose to sign with the Knicks, he would’ve paid nearly $1.1 million a year in state and local taxes for the just the home games he played at Madison Square Garden.1
Dirk and LeBron are far from the only players who look at state and local tax rates when deciding where to take their talents.
This offseason, owners and players will negotiate a new Collective Bargaining Agreement, which will likely result in an even stricter salary cap and more stringent limitations on maximum player salaries. If that is the case, expect income tax rates to play an even greater role in determining the NBA’s winners and losers in the future.
1Players are taxed based on where each game is played. Their local tax rate only applies to home games. Some cities and states collect income taxes on visiting players, a practice commonly known as the "jock tax." A few states, including Pennsylvania, even charge higher tax rates on visiting teams than home teams.