We've been writing for years now at Wonkblog about how California's highest-in-the-nation income tax rates don't seem to be crippling the state's economy, or producing the high-earner exodus that many conservatives once predicted. The simple explanation for that is tax rates are only part of the calculation that people make on where to live. Kevin Durant just became the textbook example of how that works.
Durant is a six-time All-Star forward in the National Basketball Association, whose contract with the Oklahoma City Thunder expired at the end of this past season. Given his choice of signing with basically any team in the league, he announced Monday he'll be joining the Golden State Warriors, who play their home games in Oakland, thus subjecting Durant to California's state income tax for more than half his salary.
The decision cost Durant millions of dollars, for a couple of reasons. The NBA has rules that limit how much teams can pay individual players. Because those rules would have allowed Oklahoma City to pay Durant more than anyone else, Durant left a lot of money on the table signing with Golden State. On top of that, he will pay substantially higher taxes than if he had joined, say, the Miami Heat, which plays its home games in a state with no income tax at all.
Durant has already earned tens of millions of dollars from previous contracts and from endorsement deals, including one with Nike. His decision suggests that money is not the driving factor at this stage in his career. He'd rather join the league's most talented team, the Warriors, and dramatically increase his odds of winning one or more NBA championships.
The desire to be surrounded by top talent similarly appears to be keeping companies and top workers in California, even after top tax rates went up. That's the lure of Silicon Valley to an engineer or Hollywood to an entertainer. Long-run economic studies have found that abundant innovation, and not low tax rates, is the best predictor of whether a state's economy will grow faster or slower than its peers.
It is fair to ask, though, whether the less-than-free-market economics of the NBA exacerbate this effect. Salary limits prevent superstars such as Durant from earning anywhere close to their true worth on the free market. A few years ago, the sports columnist Bill Simmons suggested LeBron James would be actually worth $75 million per season on a truly open NBA market, more than quadruple what he was earning at the time. Salaries have only gone up in the league since then, thanks to increasing revenues, leading to even wider disparities for superstars.
As my former colleague Neil Irwin, now of the New York Times, noted today:
I'm only a casual NBA fan but isn't something like Durant to Warriors fully predictable when max-salary is way below true market value?
— Neil Irwin (@Neil_Irwin) July 4, 2016
The answer is likely yes, but maybe not.
One argument is that if superstars were paid their true value, they would have a much harder time turning down the highest offer. What if, say, the income-tax-free Heat promised Durant $100 million a season? Even if the Warriors countered with the same amount, the tax difference would be enormous; something like $7 million a year, by a very rough calculation. (The top tax rate in California, for income above $1 million a year, is 13.3 percent; the Warriors play slightly more than half their games in the state, because of road games with teams in Los Angeles and Sacramento.)
Maybe, though, the higher chance of a championship ring is worth more to Durant than $7 million a year. Maybe it's worth $30 million a year. Maybe it's priceless. No one can say but Durant.
Every player has his own utility function, as economists call it. Money is a huge part of those functions. But as we're seeing, it's not the only part.