One of the biggest free agents to hit the market this summer will be former LA Laker - Dwight Howard. Five teams seem to be in the running for Dwight Howard and Dwight has stated he will announce his decision shortly after July 11th. Of the five teams vying for Howard to "take his talents to" - the Houston Rockets met with him Sunday night, Golden State and Atlanta are set to meet with him Monday, and the Dallas Mavericks and LA Lakers on Tuesday.
Regarding the logistics of the amount of money these teams will be offering Dwight, all of them will be offering him a max contract but the Collective Bargaining Agreement (CBA) of the NBA allows the Lakers (his most recent team) to offer him a longer and larger contract. The Rockets, Golden State, Atlanta, and Dallas can "only" offer Dwight a 4 year contract for $87,500,000 ($21,875,000 / yr) while the Lakers can offer a 5 year contract for $118,000,000 ($23,600,000 / yr).
"A nightmare; a bad dream. I couldn't wake up out of it. It seemed like nothing could go right from the start."
The NBA’s Collective Bargaining Agreement is designed to allow teams for whom a player currently plays to be able to offer that athlete a better contract than any other team in the league. This means the maximum contract the LA Lakers will be able to offer Howard is a 5 year contract for $118,000,000 but the maximum any other team, such as the Houston Rockets, can offer is a 4 year contract for $87,500,000. Simply put, the Lakers can pay Howard $23,600,000 per year when the Houston Rockets can only offer to pay him $21,875,000 a year. Extending that to four years, the Lakers can pay Howard $6,900,000 more than the Rockets could. So it’s a no brainer, Superman is going to stay with the Lakers.
Not so fast, Jimmy Olsen.
The Houston Rockets will actually be able to offer Howard a bigger contract thanks to their state income tax laws.
Regardless of where Howard plays, he will have to pay his federal income taxes so there is no difference between the two teams there. Because there is such a high tax rate in California it is likely that Howard will not live in the state of California. Living there would mean he would have to pay California state income taxes on his entire salary as well as all of the endorsement offers he receives. Since Howard doesn’t live in the state, he is subject to California taxes under what is more commonly known as the “jock tax”.
The tax reasoning behind this is that you are supposed to pay taxes in the state that you earn them. Under this reasoning, athletes pay state income taxes on each state they travel to because those states consider the athletes to have earned that part of their yearly salary in that state. States calculate how much an athlete owes their state by determining how many “duty days” an athlete spends in their state. Duty days are jargon that simply mean how many days were you visiting a particular state. The individual states don’t just charge the athletes for game days because a player may practice in that state for a day prior to the game so why not charge them for 2 days instead of one. Counting preseason, the NBA season is approximately 183 duty days. Since Howard will be playing 41 away games he will not be spending all 183 of those days in California and thus not paying California income taxes on the days he is earning his salary in another state.
Simply, Dwight will pay income taxes to California for 64% of the salary he makes in a year. Applying 64% of Dwight Howard’s$23.6M salary to California’s 13.3% state income tax rate shows that he would pay approximately $1,848, 873 in just California state income taxes each year!
With nearly $2M in salary reduced from Howard’s annual salary from California income taxes and $0 from Texas income taxes, the net annual income Dwight can receive would be $12,447,763 from the LA Lakers and $13,254,736 from the Houston Rockets. So now instead of the Lakers having the $1.7M upper hand by being Howard’s current team, the Houston Rockets have an $806,973 upper hand on final net income that he would receive.
Is $800,000 a year enough to make Howard go to Houston?
We will see.
LeBron went from Ohio (5.92% State Income Tax) to Miami (0% State Income Tax). Was it all over state income taxes? Probably not.
Explaining the savings of $800,000 to someone who makes $23,600,000 is like asking someone making the median US income to make their next job decision based off $1,726 in annual tax savings. It’s possible, but not likely.
For calculation purposes, I assumed that of the 183 duty days in a season, 66 of those days would be spent away from California. I came to this assumption by multiplying the amount of away games a season by 1.6. This assumes that the Lakers will usually travel outside of California a day ahead of time for 6 out of every 10 away games. Three of the other 4 teams in the Lakers division are California teams so it seems this number is fairly close to the actual number.
Calculating these 66 away duty days means that Dwight Howard will only pay California on 117/183 duty days in a season.