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The NBA trade deadline, set for February 8, 2024, is a day marked by anticipation and excitement, as players find new homes and franchises reinvigorate their rosters. While trades are often analyzed for their basketball merit, there's an underlying financial narrative that often goes unnoticed: state taxes.
With players potentially moving across the country, understanding the implications of state income tax rates is indispensable. These taxes can significantly influence the take-home pay of NBA players, turning a seemingly lucrative contract into a less attractive proposition based on the player's state of residence.
Here's how this plays out for players traded to the top contenders in each conference.
State income tax rates vary widely, from the no-tax havens of states like Texas and Florida to the high rates of California and Minnesota. For NBA players, these rates can mean the difference of hundreds of thousands to millions of dollars in income.
To add complexity to the equation, NBA players, like other U.S. athletes, are subject to the so-called jock tax. They are taxed not only by their state of residence but also by the states (and certain cities) where they earn their income – that is, where they play their games. For players traded mid-season, the jock tax can result in even more complex scenarios, as they must account for various tax rates for different portions of the season, depending on their team's schedule before and after the trade.
State tax impact on free agency versus trade deadline
While the mechanisms of the NBA trade deadline and free agency are both designed to facilitate player movement, they represent very distinct experiences for the players involved. At the trade deadline, players often find that they have little control over their destinies. Trades are typically dictated by agreements between teams, with players having to adhere to the decisions made by the front offices.
On the other hand, free agency is a period where the power dynamics shift significantly. Here, players have the liberty to dictate their futures, engaging in negotiations with teams of their choice and ultimately making the call on where they wish to sign. This freedom allows them to weigh a variety of factors, including the financial implications of state taxes.
The strategic significance of state taxes is increasingly evident in these negotiations. Both players and their agents are keenly aware of the financial impact of state taxes and often use this knowledge as leverage in discussions.
For example, during the 2023 offseason, then-restricted free agent Grant Williams was dealt from the Boston Celtics to the Dallas Mavericks in a $54 million sign-and-trade deal. Williams told Jared Weiss of The Athletic, “I was thankful just because I feel like the way my agent and everybody talked about it was that this was our floor.” He added, “In Boston, it’s really like $48 million with the millionaire’s tax, so $54 million in Dallas is really like $58 million in Boston and $63 million in L.A.”
And in the MLB, Shohei Ohtani’s historic $700 million contract with the Los Angeles Dodgers has caught the tax world by storm. Not by the sheer size, but by the strategic deferral structure of the deal that could save him an astonishing $90 to $100 million in state taxes, as reported by The Athletic.
State taxes are clearly not just a footnote in the financial statements of NBA players; they are a central element in the negotiation process. During free agency, when players have all the say, the impact of state taxes can be a pivotal factor in their decision-making process, influencing not only their net income but also the strategies of the teams vying for their talents.
Justin R. Heller is the founder and president of Heller Private Wealth, a registered investment advisor with the state of Florida. It only conducts business in states where it is properly registered or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the advisor has achieved a specific level of skill or ability.
The firm is not engaged in the practice of law or accounting. You should always consult an attorney or tax professional regarding your specific legal or tax situation. State and federal tax rules are subject to change at any time. Information presented is believed to be current. It should not be viewed as personalized financial advice.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.