Will State Income Tax Bring Dwight Howard To Houston?

This dude loves taxes - Geoff Burke-US PRESSWIRE

Dwight Howard faces the biggest decision of his career. Is Texas' state income tax enough to convince Dwight to become a Houstonian?

There's no state income tax in Texas.

Has Stephen A. Smith yelled it loud enough yet?

Arguments, justifications and rumors are flying about Dwight Howard's potential move to Houston, Texas. Some put the chances as high as 50/50.

And -- there's no state income tax in Texas.

There's also no annual rush of free agent professional athletes lining up to fill the rosters of the Rockets, Texans, Cowboys, Spurs or Corpus Christi Hooks to save money.

The lack of a state income tax didn't do much to keep Carlos Beltran, Mario Williams or Mark Teixeira in the Lone Star State.

If Dwight comes to Houston, state income tax may be one of many justifications. It's unlikely to be the sole or determining factor in why he makes the move.

Here's how the one line argument plays.


The Basics:

The Lakers have the upper hand when it comes to the "Benjamin Pile" they can place on a forklift and fill Dwight's pool with:

Lakers Offer: 5 years -- $118 million
Rockets Offer: 4 years -- $87.6 million

For the uninitiated, the Lakers retain Dwight Howard's "Bird Rights." The current collective bargaining agreement allows a team to offer a longer and more lucrative deal to a player who has been under contract for three or more years.

The Lakers can make a five year contract offer as opposed to a four year contract - the fifth year is a player option.

The Lakers can offer Dwight higher annual pay raises as well, giving them a clear financial advantage over other suitors:

Lakers annual pay raises: 7.5%
Rockets annual pay raises: 4.5%

A contract offer from the Lakers is inherently more valuable than the Rockets. However there's a lot to consider.

State Income Tax - Why It Helps:

Every sportswriter and talking head has said it at least once by now, "The Rockets have an advantage because Texas has no state income tax."

That is a 100% factually accurate statement. There's no state income tax in Texas.

At the end of the day, Dwight would most certainly save some dimes by signing with the Rockets (or Mavericks or Hawks):

California State Income Tax: 13.3% (Income over $1 million)
Georgia State Income Tax: 6% (Income over $7k)
Texas State Income Tax: 0%

It's important to understand, Dwight will not receive 13.3% more money to spend on chrome plating for cars I've never heard of. He would save money, but there's no immediate TurboTax refund on the way.

Talking heads make it sound like the basement of a Dwight Howard home in Houston would be wallpapered with checks from the State Treasury.

Forbes.com posted a stellar explanation of how much money Dwight would save in state income taxes by signing with Houston:

This means that by signing with the Houston Rockets, Howard could save approximately $15.1 million ($15,700,000 less $600,000) in state income taxes on his next contract. While that doesn't make up the full $30,000,000 gross difference, it certainly eases the pain, and may be enough to convince Howard to flee for what he perceives to be a better basketball situation.

If that number is lower than you anticipated, there's a reason for that.

The "Jock Tax" - Why It Hurts:

You don't see pro-athletes moving in droves to live in or establish residency in states like South Dakota or Wyoming -- like Texas, both have no state income tax.

The truth is pro athletes pay a "Jock Tax." This means their income is taxed on a game-by-game basis requiring them to pay applicable taxes for where they lace up their kicks and slurp Gatorade.

Say you're all-bench backup center Tim Ohlbrecht. You only get off the bench for a few high fives during a painful 105 - 107 Rockets loss to the Suns in Phoenix. Keeping that folding chair warm for one day during your short shift in the NBA is subject to Arizona's 4.54% state income tax rate for individual earners over $150,000.

Are there savings by signing a contract in Texas? Yes.

It's important to know it's not an 82 game free pass. Dwight would technically be tax free for 49 games: Games against the Spurs, Mavericks, Heat, Magic and Grizzlies are not subject to state income taxes.

We can add one more game to the total if the Kings/Bucks/Bobcats ever get moved to Alaska, Nevada, New Hampshire, South Dakota, Washington or Wyoming.

Going back to the Forbes analysis - Dwight stands to save $15.1 million in taxes by signing with the Rockets. But it comes with one less year of currency filled wheelbarrows.

A good counter-example to this is the common practice corporations use to avoid state taxes.

Companies almost universally file their papers of incorporation in the state of Delaware, which hosts extremely favorable corporate tax rates. Companies then claim revenue and income in Delaware at a far lower tax rate than they would have to in New York City. In fact, Delaware officially hosts more corporate entities than people.

NBA players don't have the same out when it comes to the money they earn for being on the court. There's no secret gated community in Las Vegas, Nevada (no state income tax) where Carmelo and KG are neighbors for the purposes of filing their W-2's.

Hell, even the dude who's presumably wearing a bow tie and counting visor at Forbes recommends Dwight consider the on-court aspects of the deal over the money.

Cost of Living - Why It Helps:

If you're a multi-millionaire 27 year-old intent on monogramming everything you buy with the Superman logo it's good to live in Houston, Texas.

Patrick Ewing famously remarked that NBA players "spend a lot of money."

Why not do it in Houston?

Forbes will tell you a paycheck in Houston goes further than any other major city in the nation.


Houston has spent several years at the top of these rankings. If Dwight wants to throw a foam party in his guesthouse or buy a Roger Clemens sized mansion. Houston is one of the best places in the nation to do it.

Dwight's NEXT Contract - Why It Helps:

No matter which team Dwight signs with, it will be just four years before there is another round of contract negotiations.

There's no lack of confidence in an NBA player's persona.

NBA analysts go so far as to positively describe players as possessing "irrational confidence." If Nate Robinson has that much swag on the court, imagine what he's like in the club, playing in a softball game or during contract negotiations.

There's zero doubt in the NBA's collective mind, Dwight Howard knows he has a contract left after the one he signs this year at the age of 27.

Under this presumption: A four year offer from the Rockets could carry as much weight as a five year offer from the Lakers in Dwight's mind.


The Dwyane Wade Contract:

Barring any career ending or threatening injury a 31 year-old Dwight could still command a max contract. Centers in the NBA are that valuable:

In 2006 a 31-year old Ben Wallace landed a four year $60 million contract from the Bulls.

In 2005 a 33-year old Shaq landed a five year $100 million contract from the Heat. The Cavs paid Shaq $20 million five years later in the last year of this deal. What a value.

The economics of the NBA are changing, but the scarcity of centers and the willingness for NBA teams to fork over cash for them has not waned.

With a history of nagging injuries, Dwight should be looking to sign his "Dwyane Wade Contract" the minute he turns 30.

Definition: The Dwyane Wade Contract - The contract signed when you're an elite NBA player that lasts far past any recognition of value.

Wade might win a title this year, but there's little doubt about his physical decline. There's not a franchise in the league interested in giving Wade what he's set to earn over the next three years: 2013: $19 million | 2014: $20.5 million | 2015: $22 million (2014 & 2015 are player options).

Dwight should be looking to sign this contract at the age of 31, not wait till 32.


Agent Take:

Not to be forgotten - Every contract gives up a percentage to the agent or agency making a deal happen. The raw value of a contract means a larger take home for all those involved.

State Taxes Change:

Not referencing tax cuts -- Alex Rodriguez signed the then largest contract in baseball history with the intent of paying zero in state taxes while living in the DFW metro area: $252 million.

That only lasted three years. A-Rod made a famous move to the Yankees after his romance blossomed with Cameron Diaz (I don't remember or care why he went to the Yankees. I just love the story of how Carmelo went to NYC for Lala).

On the Rangers, A-Rod raked an estimated $66 million (of an expected $252 million) free of state income tax before transitioning to the less favorable taxes of New York State.

The lesson here -- there's no telling where a player may end up paying state income taxes. We can be certain the LA front office is prepared to remind Dwight about Daryl Morey's trade happy tendencies. They're prepared to tell Dwight that a four year commitment with Houston is far from a guarantee.


It's entirely possible Dwight Howard could shed the purple and gold for the Rockets throwback red and yellow.

Dwight doesn't have HR Block calculating the differences in state taxes for him. He will be well aware of what he stands to save and how much the Rockets offer can save him in taxes.

There's dozens of considerations on top of this and many players before him have shunned he argument as the sole reasoning for playing in Texas.

If Dwight puts on a Rockets jersey next season, the taxes won't be the sole reason for that. I'd bet James Harden, Chandler Parsons and Kevin McHale have more say.

But it never hurts to repeat...

Dear Dwight, there's no state income tax in Texas.

*See an angle I don't? Fill the comment section with it.

**Don't file your taxes using any of the information in this article.

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