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LeBron's Departure from Cleveland - The Role of Taxes

Like any economic decision, the decision to switch employers involves a balancing of costs and benefits.  Including all monetary and non-monetary factors, if the benefits obtained from switching employers exceed the costs, then a rational, self-interested person will make the switch.

The world of highly-paid professional athletes is no different at its core.  Last night, the American sports world waited with bated breath while LeBron James announced his free agency decision.  As you no doubt know by now, James announced he would be leaving his home state of Ohio to play in sunny Miami, Fl.

What played into his decision?  In James' official announcement, he pointed to the usual thing:  the chance to win a championship.  No doubt that's important to him, but something else also figured into his decision according to this article by Brian Windhorst of the Cleveland Plain Dealer: a lower tax bill.

"James, the Cavs' all-time leader in scoring among other categories, potentially could be leaving as much as $40 million on the table by not signing a maximum contract with the Cavs and instead going with the Heat. It is believed Miami officials attempted to get around this fact by pointing out the difference in state income tax rates.

"Florida has none and Ohio's is six percent. James would have to pay out-of-state income tax for most of his 41 road games per season, but none of his home games. That is a difference that could save James millions over the next five years when also including his endorsement earnings, which are believed to be about $15-20 million per year."

I can't blame Cav's fans or the team's owner for being upset at James' decision, I find it hard to fault him for arriving at a decision in a manner that the rest of us use every day.

4 Comments

  • Avatar Of Dan
    Dan July 9, 2010

    Plus think of the money he will save by not having to pay a CPA to prepare a Florida return.

    I doubt James would have paid 40 million in state taxes to Ohio or New York but it is a good reminder to states that some people have options besides being seen as a cash register for politicians. Of course the only politician to understand that rich people have options like moving out of high tax states is Christie in New Jersey. Every politician in New York feels that high taxes are a small price to pay for living in their paradise. If they could just get their tax rates a little higher on rich people the state would have just the right amount of money.

    This is a case where money was not the most important factor in a free agent’s decision so good for James.

  • Avatar Of Howard Gold
    howard gold July 10, 2010

    Everything I hear and read about LeBron James implies and sometimes expressly states he is very business saavy. He is intelligent enough to calculate that net-net he’ll get the same money in Florida but also get Bosh and Dwade. Good deal for LeBron.

  • Avatar Of Mark R
    mark r July 12, 2010

    New York has much lower property taxes than new jersey though. New York is really high just not stratospheric like NJ. Sales tax is also 1.875 percent higher. In the northeast they will get you, somehow.

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