Professor Michael McCann dives into the tax implications for athletes around prizes and contracts, centered around NBA star James Harden and 2020 Masters winner, Dustin Johnson. Produced and Hosted by A. J. Kierstead
Professor McCann's Sportico articles on these topics can be read at https://www.sportico.com/law/analysis/2020/james-harden-nets-trade-1234616755/ and https://www.sportico.com/law/analysis/2020/dustin-johnson-masters-prize-purse-taxes-1234616669/
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Legal topics include sports law, contracts, tax law, state law, federal law, basketball, golf
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A. J. Kierstead (Host):
Taxes, boring on paper, but it has a large [inaudible 00:00:04] implication. Professor Mike McCann joins me to discuss. This is the Legal Impact, presented by the University of New Hampshire Franklin Peters School of Law, now accepting applications for JD graduate programs and online professional certificates. Learn more and apply at Law.UNH.edu. Opinions discussed are solely the opinion of the faculty or host, and do not constitute legal advice or necessarily represent the official views of the University of New Hampshire.
A. J. Kierstead (Host):
So Mike, today's episode is centered around two recent articles you wrote for Sportico, that I'll link to in the episode description. Before we dive into the two specific cases, what are some of the high-level impacts taxes and tax law have on the sports industry operates from a legal perspective?
Michael McCann:
Thanks, A.J. And these articles I co-wrote with Robert Raiola, who is a tremendous accountant, sports accountant in the New York area and one of the things that we write about is the role of taxes in ultimate take-home pay for athletes. And of course, taxes are important for all of us in terms of our take-home pay, but given the amount of money that athletes make, the differences between what they can make working in one state and residing in one state versus another can be enormous, and it's something that often gets attention when there are free agent players, and they have opportunities to join different teams.
Michael McCann:
If a player joins a team in California, he or she may make a lot less than if they joined a team in Texas, where there's no state income tax. And as a result, certainly for the player, they have to decide what matters. Is it winning? Is it where they live? Is it culture, in terms of where they want to be around, if they're married, is it where they want to raise their family? Is it near where they grew up? There are all sorts of considerations, which of course is true for all of us. But the question is, to what extent does pretty significant differences in state taxes impact that decision, and we're seeing numbers where it could be tens of millions of dollars of difference because of state tax differences.
A. J. Kierstead (Host):
First case that you wrote about was regarding the Masters Tournament winner, Dustin Johnson. What's going on in that situation?
Michael McCann:
Yeah, so Dustin Johnson won the 2020 Masters Tournament in Augusta National Golf Club in Georgia. It's considered the most prestigious tournament in the sport. The winner gets to wear the fabled green jacket, and we can all remember Tiger Woods wearing it, Jack Nicklaus, Arnold Palmer, other legends have also won it. So in terms of sheer prestige, I think there's a consensus that it's at the very top of the list. But it's not the most lucrative tournament in golf.
A. J. Kierstead (Host):
Yeah, I was kind of surprised reading the take-home numbers for the people that win.
Michael McCann:
Yeah, so it's a leap, but the US Open, which is also of course super prestigious. I don't want to act like it's not a big deal, but it doesn't have quite that same cache as the Masters. Well, the US Open will win more money. The winner of the Masters takes home $2.07 million. The winner of the US Open takes home $2.25 million. Obviously, it's a ton of money in either case, but it's interesting that the more prestigious one isn't as lucrative. However, because of tax law, the winner of the US Open this year plays in New York, and as a result, New York taxes apply. New York taxes are significantly higher than in Georgia. So even though the difference between them is quite a lot of money, $180,000, it shrinks to $26,000 after taxes. So, it just goes to show you how significant state tax differences can be.
A. J. Kierstead (Host):
Yeah, I mean, and we're seeing this especially coming with people from California, with their tax rates. There's also obviously the COVID implications with Governor Newsom, but a bunch of people are jumping ship and heading off to Texas and things like that, because of it.
Michael McCann:
Yeah, at some point, state taxes probably start impacting what people do. Right? And if one is going to pay 13% in taxes in one state versus 0% in another, at some level, that has an impact on behavior. There will be some who say it doesn't have a big impact, that people live where they want to live. There's probably some truth to that. But I think as the gap between states without an income tax and states that impose high income taxes grows, and it has grown, we will see people walk with their feet, right? They'll go live in locations, assuming they can work there, where they can make a lot more money, just by virtue of not paying a tax. And again, that can include cost of living differences. Right? I mean, the cost of living differences moving to Manhattan versus living in our state of New Hampshire, it's a very different story.
A. J. Kierstead (Host):
Now, in what is more of a widely-known situation, at least for sports fans is James Harden is going to face a very tough decision financially with the tax implications, correct?
Michael McCann:
Yeah, so James Harden is one of the best players of course in the NBA. He really wants to go from what we understand, to the Brooklyn Nets. The Brooklyn Nets have Kevin Durant, Kyrie Irving. They are a roster of stars. At least in theory, if Harden joins that roster, he would have a legitimate shot at an NBA title, which has eluded him in his career to date. Even though he has won the MVP award, he's been an eight-time all-star, has led the NBA in scoring the last three seasons. If you look at any individual achievement, he's at the top of the list. But there's something to be said for a player winning a championship. Obviously, it's something that the greats have done, whether it's Michael Jordan, Kobe Bryant, LeBron James, Larry Bird, Magic Johnson.
Michael McCann:
That caliber has gotten a title, something that he doesn't yet have. And again, he's 31. So, not old by any stretch, but also probably in the second half of his career. And as a result, this is one idea, is that he could be traded to Brooklyn. Well, if that happens, he would pay a lot more in taxes. Over the next two seasons, he has owed $133 million. Now, he's going to pay federal income taxes regardless. He's also going to pay jock taxes, which are taxes that are assigned on athletes from visiting teams when they play. So that's going to be there no matter what. But the difference would be in Texas, it's one of nine states without an income tax on wages.
Michael McCann:
Go to New York, in New York City, the combined tax rate is 12.7%. So think about it, 0% versus 12.7%. It ends up being a difference of $13.6 million. That's a lot of money. Now, Harden may say, "I don't care." He's already made over $200 million in his career. He's going to make much more regardless, and he has endorsement deals, maybe $13.6 million, obviously to you and I and everyone listening to this, that's a crazy amount of money, but to him it may not be, for all we know. So maybe it's not a big deal. But it just goes to show you the difference.
A. J. Kierstead (Host):
It's prestige versus take-home, especially when you're in that second half of your career, or later on where you have the chance it likely will never happen again is definitely a huge determining factor for these athletes.
Michael McCann:
This is legacy, right? At some point, it comes down to if you're a player like James Harden, and you want to be remembered of the ilk of a Kobe Bryant, LeBron James, Michael Jordan, Larry Bird, Magic Johnson, you probably have to win a title. Maybe it's unfair, but the lack of a title is something that might bother him as the years go on, that he might view it as sort of diminishing him relative to that sort of top-level player. Now again, it's not really fair, because you have to play on a great team to win a championship.
Michael McCann:
You can't win it by yourself. So it's always been sort of an unfair metric, but nonetheless, it's something that people think about. And as a result, he may view it as if he stays in Houston, the team appears to be in a rebuilding stage. They have a new general manager, new coach, again, he's 31. When are they going to be in a position to compete against the Lakers and other top teams in the West, let alone teams in the Eastern Conference? He may think, "Look, if I go to Brooklyn, that team with me on it could go to the NBA Finals and maybe win." Whereas staying in Houston seems much less likely for that to happen.
A. J. Kierstead (Host):
Thanks for listening to the Legal Impact, presented by UNH Franklin Peters School of Law. To help spread word about the show, please be sure to subscribe and comment on your favorite podcast platform, including Apple Podcasts, Google Play, and Spotify.
