It seems like every April and election season, we Americans are deluged with news and debates on federal tax policy (which, admittedly, is a complete debacle). Much less attention, however, is paid to state tax policy, despite the fact that moving from one state to another can, as opposed to federal tax policy, have a real an instant impact on a person’s current and future financial well-being. If you don’t believe me, I invite you try out the NCPA’s state tax calculator, which determines “how the decision to move to another state will impact your family’s living standard” due to differences in the states’ income, property and sales taxes. After entering in various details about yourself and your financial position, the calculator shows (i) how much additional (or less) disposable income you’ll have in your new state; and (ii) how much wealth you’ll accumulate (or lose out on) over your lifetime.
All of that admittedly sounds a little wonky, so let’s clarify the point with the, ahem, real world example of controversial, well-traveled NBA center Dwight Howard. As you may have heard, Howard this summer chose to sign a 4-year, $87 million contract with the Houston Rockets instead of staying put with the LA Lakers. At the time of the signing, two bits of conventional wisdom prevailed: first, Howard was leaving millions of dollars on the table because NBA rules allowed his current team (the Lakers) to offer a lot more than the Rockets for Howard’s services; and second, given these potential monetary losses, Howard’s departure was motivated in large part by the insufferability of his cranky Lakers teammate, Kobe Bryant.
However, when you run Howard’s numbers (or reasonable estimates based on some Googling) through NCPA’s tax calculator, you see that neither of these things is necessarily true because Howard will very likely save a small fortune living and working in tax-light Texas versus what he would’ve faced in tax-crazy (and very expensive) California. Indeed, according to NCPA and my back-of-the-napkin guesstimates, Howard will save over $1 million per year in taxes alone by moving to Texas, and many millions more over his working lifetime (though not nearly the $100+ million shown on NCPA’s website since Howard won’t be working into his 50s or 60s as an NBA center). The conventional wisdom goes further down the tubes when you realize that the majority of his “lost millions” in LA were on the back-end of Howard’s contract – something that the nomadic NBA player has never actually seen in his career. Thus, if these estimates are correct (and, yes, they are admittedly just estimates), Howard could actually take home more money in Houston for the next few years than he would’ve banked in L.A.
Thus, assuming that Howard has a good accountant with a reasonable grasp of state tax policy (a fairly safe assumption, I’d say), he would’ve been acutely aware that he stood to save millions in taxes by moving from California to Texas. And, given this fact, it’s quite possible that Kobe Bryant’s alleged insufferability had very little to do with the big move. (His achilles and teammates, on the other hand…) Granted, this is mostly in jest and we don’t really know enough about Howard’s financial situation to know the exact gains or losses, but the main point definitely stands: Dwight Howard isn’t taking nearly the financial “losses” that most people claimed because his mere presence in Texas instantly makes him a heckuva lot richer.
These numbers also tell us more than just whether Kobe Bryant is unbearable: they show the dramatic extent to which state tax policy – and a few hundred miles – can affect Americans’ lives. You can have the same salary, house payment, savings account, etc, but a simple change in your zipcode can spell the difference between making ends meet or retiring in relative comfort and failing to meet such critical life goals. So maybe a guy like Dwight Howard doesn’t need* all that extra cash, but the typical American family most certainly does. And if your family can get ahead by moving from one state to another, then I say load up the trucks and get going.
*He might not need the money, but he undoubtedly would spend it better than the brain trusts in Sacramento and LA.
The views expressed herein are Scott Lincicome’s alone and do not necessarily represent the views of his employer, White & Case, LLP.