(Image courtesy of Rockets.ClutchFans.net)
In light of the 2-3 year Dwight Howard drama that has allowed him to play for 2 different teams and 3 different coaches, it seems that it is finally over. The All-Star center has decided to take his talents to Houston and play for coach Kevin McHale and with James Harden.
The big story surrounding where Dwight Howard would sign revolved around coaches, style of play, the current roster, roster flexibility, and (drum roll please)…MONEY. By staying with the L.A. Lakers, Dwight could have signed for 5-years and $117 million. By signing with Houston, Dallas, Golden State, or Atlanta he could only sign for 4-years and $88 million (the NBA Collective Bargaining Agreement allows the current team of a free agent to offer 1 more year and more money to the free agent).
The big question has been, why would Dwight Howard leave $30 million on the table to go play in Houston? If you are aware of the U.S. tax structure, he is leaving far less on the table than $30 million. He is actually only leaving $9 million on the table. Here is how it all works out:
1. The effective tax rate for those who earn over $400,000 in the U.S. is 39.6%.
2. The effective state income tax rate for California residents who earn over $1 million is an extra 13.3%. (That’s what pro golfer Phil Mickelson was complaining about.)
3. The effective state income tax rate for Texas residents is 0%.
4. NBA players are taxed for 41 games in their home state and 41 games in the other states (plus Canada) that they play games in. It is understood that states like CA, TX, FL, and NY have multiple teams.
5. The average state income tax level for all of the states that have NBA teams is 4.6%. We will add the 4.6% state average rate to the 39.6% federal rate for away games to come up with a 44.2% tax rate for away games.
Now let’s do the math:
Staying in Los Angeles, CA with the Lakers, with a 5-yr/$117 million contract:
41 homes games = $58.5 million (52.9% tax rate) = $27.5 million left
41 away games = $58.5 million (44.2% tax rate) = $32.6 million left
Totals: $27.5 million + $32.6 million = $60.1 million after taxes
Moving to Houston, TX with the Rockets, with a 4-yr/$88 million contract:
41 homes games = $44 million (39.6% tax rate) = $26.6 million left
41 away games = $44 million (44.2% tax rate) = $24.5 million left
Total: $26.6 mil + $24.5 million = $51.1 million after taxes
Overall:
$60.1 million – $51.1 million = $9 million
To see/hear a verbal breakdown of the comparison of Dwight Howard’s projected earnings, click HERE!
Aquil Bayyan of The War Room, for War Room Sports
