Is Lefty's stance on California's tax hikes a sign of things to come for millionaire athletes?
The Golden State's new 13.3 percent income tax on top earners prompted golfer Phil Mickelson to say earlier this month he was considering a move, and according to the accountants who advise millionaire athletes, he was just saying what a lot of jocks were already thinking. Federal taxes on the top income bracket just rose by roughly 5 percent, and, while there's nothing rich athletes can do about that, they are paying attention to which states dip into their game checks — and how much they take.
“They’re going to have an exodus of people,” said John Karaffa, president of ProSport CPA, a Virginia-based firm that represents nearly 300 professional athletes, primarily in basketball and football. “I think they’ll see some [leave California] for sure. They were already a very high tax state and it’s getting to a point where folks have to make a business decision as well as a lifestyle decision.”
The taxes of professional athletes became incredibly complicated in the early 1990s, when aggressive state and local tax collectors began targeting them to pay non-resident income taxes. Technically, all employees who earn money for work done outside their home states have to pay non-resident taxes, but enforcement has focused on millionaire athletes with publicized work schedules to the extent is is commonly called the "jock tax." Although ballplayers can't get out of the state and local taxes they pay while on the road, where they play their home games can make a huge difference. California takes 13.3 percent on income above $1 million, but states like Florida, Nevada and Texas are among seven that take nothing.
"They were already a very high tax state and it’s getting to a point where folks have to make a business decision as well as a lifestyle decision.”
- John Karaffa, president, ProSport CPA
It adds up, says Karaffa. As tax season enters full bloom, he expects to see an uptick in the number of clients who will consider leaving California. Under a hypothetical calculation, the tax difference for a single professional athlete making roughly $10 million a year between being a resident of California versus Florida is around $800,000 annually.
“They’ll start to see it more from paycheck to paycheck,” Karaffa said of the state’s tax bite. “And it’ll actually help my practice because guys will ask more questions and be more attuned to this. You’ll see more attention paid from professional athletes to their taxes this year because this is their largest expense.”
Karaffa, like other accountants interviewed for this article, declined to identify his clients, but relocation for tax relief by men and women who play games for a living isn’t new. Former Los Angeles Angels outfielder Torii Hunter, who recently signed with the Detroit Tigers, made headlines last year when he announced a move to Texas because of the state’s lack of income tax. The move didn't shelter his game checks from income taxes, but it did allow him to save taxes on other income, including for endorsements and autograph signings.
Hunter did save taxes on his $12 million salary by leaving California to sign with Detroit, where the Michigan state income tax is a flat 4.35 percent. And more and more ballplayers are taking taxes into account when signing with new teams or giving their teams permission to trade them.
“They’re thinking about it more often, absolutely,” said Art Hurley, partner with Daszkal Bolton and founder of its professional athlete and celebrity niche practice, Game Plan. “It’s something the professional and their advisers have been thinking about for a long time.”
For top golfers and tennis players, who make most of their money through endorsements not subject to the "jock tax," the choice of where to live has a huge impact. Mickelson, of Rancho Santa Fe, Calif., quickly apologized for riling critics on Jan. 20 when he said an effective federal and state tax rate of 60-plus percent seemed excessive. But he was likely only saying what others were already thinking, especially after California voters approved Proposition 30 last November. In addition to raising the state sales tax, it imposed a menu of new tax brackets. Just the increase of the top bracket to 13.3 percent from 10.3 percent cost Mickelson roughly $1.8 million of his $60 million income for 2012.
Mickelson’s longtime rival, Tiger Woods, acknowledged last week that he left California for Florida in 1996 upon turning pro because of the difference in state tax. At the time, California’s top rate was 9.3 percent for individuals earning more than $32,000. Woods, who earned $56.4 million in 2012, kept roughly $7.5 million this year in funds he otherwise would have owed to the state of California. Mickelson, who will now pay the 13.3 percent rate, will owe the state about $8 million.
“The more expensive it gets, the more you’re going to look elsewhere,” Hurley said. “'How much extra am I willing to pay to live in California?' And when you have a guy like Mickelson who makes so much money … just think about if he was living in Florida.”