Dwight Howard’s Move To Houston, Taxes, And Why Athletes Choose To Play Where They Do

Dwight Howard (Credit: AP)

Dwight Howard’s decision to leave the Los Angeles Lakers to sign with the Houston Rockets has been hailed as a victory by anti-tax advocates. The Lakers offered Howard a five-year, $119 million contract, but he opted for Houston’s four-year, $88 million deal, and those advocates have argued that Howard will actually make more money because Texas doesn’t have an income tax. That isn’t necessarily true, as Slate’s Matt Yglesias noted, since many of those analyses (including this one from John Kartch at Grover Norquist’s Americans for Tax Reform) ignore tax deductions, how taxes are calculated on professional athletes, and how NBA contracts are structured.

Still, the broader argument ATR and other no-tax advocates are making is that labor and capital — in this instance, Dwight Howard — will naturally flow toward states and localities with lower or zero tax rates. For professional athletes, it’s possible that’s true. Economists Henrik Jacobsen Kleven, Camille Landais, and Emmanuel Saez found in a 2009 study of European soccer that there is evidence that “low taxes attract high ability players who displace low ability players.”

That would seem an instant validation of the ATR worldview, except that the authors also found that “players are likely to be a particularly mobile segment of the labor market, and our study therefore provides an upper bound on the migration response for the labor market as a whole.” Put simply, superstar athletes are a special class of worker, and because they are highly-skilled and highly-mobile, they tend to respond to tax policy more sensitively than workers who don’t have the means, the need, or the desire to be as mobile. Even other athletes who aren’t superstars like Howard often play simply where they get a chance. So while the findings might be broadly applicable to other superstar athletes, it’s unlikely that American workers as a whole are going to take their talents to Houston, South Beach, or anywhere else just because they’re irritated about taxes.

Athletes’ unique mobility isn’t the only reason for that. In a normal world, businesses and their employees tend to cluster around places that are most advantageous to them for any number of reasons. Tax policy is only one factor in why people choose to live where they do — and it’s often a small one. The financial industry clusters in New York and the tech industry in Silicon Valley despite higher tax rates because those are the places where business is best conducted and the places the people in those businesses want to live.

That works differently in sports because athletes, not franchises, cluster. Where players do business is less dependent on where the industry prospers because it succeeds from Boston to LA and plenty of places in between. That, along with athletes’ unique ability to move wherever they need or want to, boosts the effect of tax rates on their decisions. Even then it isn’t the only factor. Howard didn’t leave Orlando for Los Angeles because he wanted to pay more in taxes. He did so because he felt playing with Kobe Bryant, Pau Gasol, and Steve Nash gave him the best chance to win. Likewise, his decision to move to Houston probably has as much to do with the fact that he wants to win a title with James Harden, a complementary talent, as it does with Texas’ low tax rates. That’s even more likely considering, as Yglesias detailed, Howard probably isn’t saving himself any money and might instead cost himself in the long-term (under NBA contract rules, the maximum teams can offer a player is based on the value of his last contract, so lowering his baseline could cost Howard substantially if he’s looking for another max deal in four years).

If players were overly reliant on tax policy, teams in Texas and Florida should thrive while teams in New York, California, and Massachusetts wither. But while the NBA’s past three Finals have featured two teams from low-tax states, teams from high-tax states have had plenty of recent success — the Lakers have five titles since 2000, Boston has another, and Chicago has re-emerged as a perennial contender after dominating the 1990s. High-tax teams have won more titles than their low-tax counterparts in both Major League Baseball and the NFL since the turn of the century.

The lesson is simple: tax rates can and often do matter when players like Dwight Howard choose where to play. But they are far from the only factor in those decisions, and they are a larger factor for superstar athletes than they are for the general population because athletes aren’t restricted or influenced by the same factors that face ordinary workers and their businesses. Touting Dwight Howard’s decision as a victory for their vision of tax policy might make ATR and other low-tax advocates feel good, but it doesn’t mean that their math is right or that their race-to-the-bottom tax ideology is ideally suited for the real world.