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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.

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