Tuesday, February 2, 2010

Declare the Pennies

A lot of pundits apparently believe that Chris Bosh is the likeliest of the top free agents to switch teams this coming July. One under-commented issue is the discrepancy in personal income tax rates between the several jurisdictions where he might end up. We know from Article IX, Section I of the Collective Bargaining Agreement that a free agent can sign up to a six-year contract with his current team, but only five with a new team. We also know that the maximum annual salary, per Article II, Section 7 of the CBA, is 30% of the salary cap, which will probably be about $53 MM, so the maximum annual salary is about $16 MM. Bosh can earn $16 MM more in guaranteed money (if he wishes to tie himself down for six years) by staying with Toronto.

However, how would tax rates alter this calculation? Let us imagine that Bosh scores a contract worth $16 MM per season. Let us consider three jurisdictions given Bosh's top three likely free-agency destinations: Ontario, New York State, and Florida.

The top marginal tax rate in Ontario, considering both federal and provincial taxes, is 43%.

Meanwhile, the top federal marginal tax rate in the United States is 35%.

Florida has ZERO personal income tax.

In New York State, the top state marginal tax rate is 8.97% and the New York City marginal tax rate is 3.648%.

Of course, the top marginal tax rate is a smidge less than the average tax rate over all Bosh's income, so we need to calibrate our calculations carefully.

I will omit much detail of my calculations (I was considering making a Google Docs spreadsheet showing my calculations, but really, life is too short), but here is my estimate of Bosh's total annual tax liability (including federal taxation) in each of the three jurisdictions:

Ontario: $7.388 MM
New York: $7.594 MM
Florida: $5.575 MM

Note that all figures here are U.S. dollars. Presumably Bosh is paid in the Canadian equivalent of USD 16 MM, or perhaps directly in USD. U.S.-Canada exchange rates are presently near parity, but to be thorough, I converted USD 16 MM to Canadian dollars, calculated his Canadian tax liability, and converted that to USD. We cannot simply apply Canadian tax rates to his nominal USD 16 MM, because due to the progressive structure of marginal tax rates, the amount of dollars in the top bracket would be incorrect.

Other than standard deductions and 1 personal exemption, I am ignoring all special adjustments, credits, exemptions, and deductions (though if Bosh buys an expensive house in his imaginary new home, the comparative tax benefits from federal interest-and-property-tax deductions would be rather large in Florida or New York, versus nothing at all in Ontario).

So New York has the highest tax burden, with Ontario a close second. The Florida tax liability (entirely owed to the U.S. government) is significantly cheaper. Again, if Bosh wants to buy a home (although presumably he already has purchased a Toronto home; he would probably sell that upon moving back to the States), Ontario's tax burden would definitely become the dearest. I will refrain from attempting to estimate the magnitude of Bosh's tax deduction from mortgage payments and property tax paid in the U.S. — I will leave that an exercise for you, our dear readers.

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