A Financial Look At Dwight Howard's Options Under New CBA

Feb 22, 2012 8:16 PM EST

Over the coming weeks and possibly months, the eventual resolution of the Dwight Howard situation will be the first major test of how, if at all, the new CBA has shifted the dynamics behind teams’ efforts to retain their franchise players.

The new rules were designed to increase the leverage of teams while reducing the power players possess to dictate when and where they will be moved.

The home team, which holds the player’s Bird Rights, can offer 7.5% annual salary raises, compared to 4.5% annual raises for all other teams. The home team can also offer a fifth contract year while all other teams are limited to four.

And perhaps most significantly, a loophole has been closed: The player can no longer receive the larger annual raises and extra contract year with a sign-and-trade from the home team to another team. The only way, as a free agent, that the player can receive these twin benefits is by staying put.

Another scenario is for the player to be traded, prior to free agency, transferring Bird Rights to the acquiring team which would then be able to offer the larger raises and an extra year. This, of course, is the essence of Howard’s request that the Magic deal him to one of his preferred destinations – reportedly New Jersey or Dallas – before this year’s March 15th trade deadline.

Will the new rules be sufficient to keep All-Stars like Howard, who have expressed a strong desire to relocate, with their current teams?

Whether the Magic front office feels comfortable enough to press its advantages at the risk of losing Howard without compensation if he simply signs elsewhere – and how Howard’s camp would then respond, as a real measure of how strongly Howard values a change of scenery over financial security – will answer the question.

Jerry West stated recently that if he found himself in the middle of such a dilemma, he would opt to try calling the player’s bluff.

“If I were an executive on a team where a player says he’s going to leave, let him leave,” West said.

Otis Smith, general manager of the Magic, might agree with West.

“He can still walk, but with a $30 million haircut,” Smith said of Howard.

It’s difficult to say, of course, whether Smith is truly prepared to follow this course of action or is simply posturing.

Below are the actual salary figures of the free-agent contract that the Magic can offer Howard compared to any other team, like the Nets or Mavericks, both of which project to have the available salary cap room to sign Howard outright this coming offseason.

Such a maximum-salary contract offer from Orlando would be $29.8 million larger than any other in total, but over the same four years, the difference is just $5.1M. Said another way, approximately 83% of Orlando’s financial edge comes from the extra fifth season, with the rest a product of the larger annual raises over the first four years.

The lion’s share of Orlando’s leverage could be decided by how confident Howard is in earning a maximum-salary contract in the season after his contract with New Jersey or Dallas would expire. Howard would be 31-and-one-half years of age when he went back on the free-agent market again (if he did not extend his contract before then, which certainly should not be taken as a given).

Orlando’s Free-Agent Max Offer to Howard

Year 1: $18,996,359
Year 2: $20,421,086
Year 3: $21,845,813
Year 4: $23,270,540
Year 5: $24,695,267
________________

$109,229, 065

Other Teams’ Free-Agent Max Offer to Howard

Year 1: $18,996,359
Year 2: $19,566,250
Year 3: $20,136,141
Year 4: $20,706,032
________________

$79,404,782

And don't forget the role of taxes. If Dwight signs with the Nets, who'll be in Brooklyn, he'll have to pay the New York State and New York City income taxes which amount to what? 8%? In Florida and Orlando there are no income taxes. That's a big plus. Same holds true in Dallas - no Texas personal income tax.

worcester,

I believe that a player's salary is divided by the number of games. That gives a $/game amount that is taxed where ever the game is played. Play a game in NYC and pay whatever amount they tax on income, play a game in Orlando, pay nothing.

In Maine, if you work in state and live out of state, you pay income tax and so does your spouse. If you live out of state and work in state, you pay income tax and so does your spouse. They get you either way. I don't know how other states apply income tax laws, but it could be similar.

However,

How much income tax exists in a NBA city only tells part of the story. Each state (and some cities) collect many kinds of taxes. Property tax, room and meals tax, gas tax, alcohol tax, tobacco tax, snack tax, sales tax, on and on......

In conclusion, if a player plays for Orlando, he probably lives there. The state will get their "pound of flesh" from him (and his posse). No income tax, no worries. The rate of property tax will be higher, the sales tax will be higher. You get the drift. Look at New Hampshire, they boast of no broad based taxes (income or sales) but if you own property there, look out. If you only rent, the landlord will pass on the property tax on to you.

Total tax burden, the whole enchilada (not Elrod), is key here. Income tax is only a part of the total.

gyso

112288, W, and gyso,

You've collectively hit on the bottom line regarding Howard. If he plays for Orlando, and makes FL his state of residence, he comes out way ahead financially over what most other teams can do for him. You guys are quite correct; you do have to look at several factors including all taxes, property acquisition or rental costs and other cost of living factors. Income and potential property taxes are still a biggie, though.

There are a few other destinations that do work out, depending on things like states reciprocal agreements on income tax and on property tax levels. Those spots are not plentiful, however. One way to entice Howard away would be to cover his tax burden. Some teams bite the tax bullet to get a player. For example, the Yankees have long paid Derek Jeter a contractual amount that covers his NY and Yonkers local taxes. Although a FL resident, as I recall, Jeter owes NY state, local and city taxes (no other metropolitan area in NY State has it's own city tax) because he is on the payroll for a corporation in Greater Manhattan and must pay NY State and NY City taxes.

Reciprocal taxes on pensions (from various leagues that pay them) and deferred income, both contractual or voluntary, also come into play depending on where the player will reside in retirement.

You guys make for a good accounting firm.

You might want to consider a name other than 112288, Worcester and gyso...

Regards

Here Is A Name


Do'we Cheat'em & Howe

112288

112288 wrote:Here Is A Name


Do'we Cheat'em & Howe

112288

If that's the name you guys are going by I'm not sure you're representing me! You might want to become sports agents and go after the really deep pockets that don't always have really deep thoughts.

How about:

William & William
Double Bill Experts

112288

Yup, that's us!!!

That's our office.

Our first advertisement!!

Our new logo. (Ain't we some classy!!)

I love you guys...

Dboss