How Big of an Advantage is "No State Income Tax" for the Rockets?

Every summer we here it. Here is a quote from the Chris Ballard article on Daryl Morey where he talks about a hard back book that the Rockets give perspective Free Agents:http://sportsillustrated.cnn.com/vault/article/magazine/MAG1206495/

So exactly what kind of advantage do the Rockets have because Texas does not have a State Income Tax?

First of all what is the difference between trying to sign your own free agent when you hold his Bird Rights vs. another team trying to sign him in Free Agency? Per Larry Coon's FAQ http://www.cbafaq.com/salarycap.htm#Q53
A standard Max Raise is - 4 years with a 4.5% raise.
A Max Raise with Bird Rights is - 5 years with a 7.5% raise.
Also per Larry Coon's FAQ http://www.cbafaq.com/salarycap.htm#Q54 Raises are not compounded annually, which basically means if you received a $450,000 raise in year one, that is the same raise you will receive in year 4 or 5.

What does all that mean in actual dollars and cents for a max free agent in the summer of 2013 like Chris Paul? Chris is in the last year of a contract that pays him $17,779,458.00 this season.

The Los Angeles Clippers can offer Chris Paul the following 'Larry Bird Exception' five year contract with an annual 7.5% pay raise based on his 2012 / 2013 season salary which comes out $1,333,459 raise in each year:

First Year - $19,112,917
Second Year - $20,446,376
Third Year - $21,779,835
Fourth Year - $23,113,294
Fifth Year - $24,446,753

The Houston Rockets can offer Chris Paul the 'Standard' four year contract with an annual 4.5% raise based on his 2012 / 2013 salary which comes out to a $800,076 raise in each year:

First Year - $18,579,534
Second Year - $19,379,580
Third Year - $20,179,626
Fourth Year - $20,979,672

Thats a pretty substantial difference. In the fourth year alone Chris Paul would make $2,133,622 less by signing in Houston! That is a significant amount, especially considering that the Rockets can't offer a fifth year. Assuming Chris Paul can overlook the lack of a fifth year, the total difference Houston ($79,118,367 four year contract) can offer verses what Los Angeles ($84,452,422 over 1st four years of the contract) can offer is $5,334,055 in favor of the L.A. Clippers. In reference to Chris Ballard's piece on Daryl Morey, that's a lot of 60-inch LED TVs.

Will "No State Income Tax" Really Make That Big Of A Difference?

To answer that question we need to know what the state income tax for a particular state is. Since Chris Paul is the example in this scenario we will use California's state income tax rate for wage earners over $1,000,001 http://swz.salary.com/salarywizard/layouthtmls/swzl_statetaxrate_ca.html which is 10.3%. My first thought when I read that was "Damn! God does not charge that much in tithing to get into heaven!" (I apologize in advance for my religiously insensitive joke)

Here is Chris Paul's annual salary from the L.A. Clippers adjusted for the California State Income Tax of 10.3%.

First Year - $19,112,917 - $1,968,630 = $17,144,287
Second Year - $20,446,376 - $2,105,977 = $18,340,399
Third Year - $21,779,835 - $2,243,323 = $19,536,515
Fourth Year - $23,113,294 - $2,380,669 = $20,732,625
Fifth Year - $24,446,753 - $2,518,016 = $21,928,737

Now here is the difference between what the Rockets could offer minus what the Clippers could offer with the salary adjusted with the California State Income Tax.

First Year - $18,579,534 - $17,144,287 = $1,435,247
Second Year - $19,379,580 - $18,340,399 = $1,039,181
Third Year - $20,179,626 - $19,536,515 = $643,111
Fourth Year - $20,979,672 - $20,732,625 = $247,047

Over the course of four years, even given the fact that the Clippers can offer a 7.5% annual raise vs the Rockets little 4.5% annual raise, the Houston Rockets can offer Chris Paul 3.365 million dollars more than the Clippers over the course of four years. That's a lot of 60-inch LED TV's.

Of course there is the matter of the fifth year that the Rockets can not offer. Certainly I would think the importance of the fifth year would very from player to player, mostly depending on their age and health. Chris Paul is 27, Dwight Howard is 26, Andrew Bynum is 25 so providing all of those players make it thru their next contract reasonably healthy they could each have one more big pay-day. Of course each of those players listed has had their own injury issues so the fifth year could be important to each of them.

What Part Does Ego Play In A Players Decision?

Is it more important for a player to walk into a room of other NBA players and say, "I make 21 million" even though his net salary is only 18 million or to make only 20 million with not income tax? Is there a status in the NBA attached to Gross Income that you don't get with Net Income? I don't know but for some reason I thought it was worth asking.

In the end there is a big difference... or is there?

The Jock Tax!!

This is one of those little state tax rules that forces a player to pay state income tax for every duty day spent in their state. There are currently eight teams that reside in states that do not require a 'Jock Tax': Rockets, Spurs, Mavericks, Grizzlies, Raptors, Wizards, Heat and Magic. There are 41 road games 10 of which are against the teams listed which leaves 31 games (duty days) a year that a player on the Houston Rockets is charged a 'Jock Tax'. That's 37% of each players salary! Just when it looked like the 'No State Income Tax' was an advantage.

I am no Tax Expert so my numbers are almost certainly off. Plus I'm guessing not all states have a State Income Tax rate equal to California's but as an example I'm going to use California's rate across the board. So, I'm taking 37% of the salary in the Chris Paul example for the Rockets and adjust for the 10.3% tax rate.

First Year - $18,579,534 * .37 = $6,874,428 * .103 = $708,066
Second Year - $19,379,580 * .37 = $7,170,444 * .103 = $738,556
Third Year - $20,179,626 * .37 = $7,466,462 * .103 = $769,046
Fourth Year - $20,979,672 * .37 = $7,762,479 * .103 = $799,535

Estimated annual State Income Tax due to the dreaded 'Jock Tax' is $3,015,203 over the course of the four year contract for Chris Paul with the Houston Rockets. The difference before the 'Jock Tax' was figured into the equation was 3.365 million dollars in favor of Houston.

With the 'Jock Tax' figured in, Houston can offer Chris Paul an estimated net gain of .35 million dollars more a year.

So there you have it. $350,000 dollars is it. That doesn't buy near as many 60-inch LED TV's as 3.5 million thats for sure. Certainly $350,000 dollars is nothing to sneeze at but in the world of NBA Stars that are making 19 to 20 million a year plus endorsements, I'm guessing thats not going to be the deciding factor in with who a player choses to sign a contract with.

On a more positive note, if the Rockets were competing on even footing with another team that was only able to offer a 'Standard' four year contract with 4.5% pay raises then I think living in a non-State Income Tax State would mean a lot more and might actually play heavily into a players decision on what team he ends up signing with. But in the case of players like Dwight Howard or Chris Paul, it's just going to come down to where they want to play and not who can offer the most money.

Conclusion: No State Income Tax provides no real advantage when trying to sign a player away from a team that controls his 'Larry Bird Rights' but does provide a significant advantage when both teams can only offer a 'Standard Contract'.