I read with great interest this post at BlueOregon by J. Graber, in which the author calls Chris Dudley an "artful tax dodger" because when Mr. Dudley played for the Trail Blazers, he chose to live in Washington. The tax dodging (says Mr. Graber) is because if Mr. Dudley had lived in Oregon, he would have paid more in Oregon income tax.
Mr. Graber's understanding of the state income tax system is a little hazy, and it seems to me that his argument is unsound. But first, the facts as he reports them. Mr. Dudley earned about $12 million from the Trail Blazers from 1993 to 1997, and during that time he paid about $440,000 to $460,000 in Oregon state income taxes.
That sounds about right, and it isn't a tax dodge: it's the law. Professional sports players occupy a peculiar place in the income tax laws: they are treated as earning their salaries based on where they play their games, and allocate their income among the states in which their teams play games based on the number of games in each state. Oregon has only one NBA team, and half its games are away games and thus out of state. A Trail Blazer who does not live in Oregon thus pays Oregon income tax on half of his Trail Blazer income, after deductions and tax credits. A player who earned $12 million over several years might reasonably have about $2 million of allowable deductions over the same period, yielding about $10 million of taxable income. Half of that, or about $5 million, would be taxed by Oregon. Oregon's top tax rate at the time was 9%. Nine percent of $5 million is $450,000, which is about what Mr. Dudley paid in Oregon taxes.
It's true that if Mr. Dudley had lived in Oregon during those years, Oregon would have taxed him on his worldwide income, not just on his Oregon-source income. The Oregon tax would have been about $900,000 on a taxable income of $10 million. However, Oregon would also have given him a tax credit for income taxes he paid to other states on his basketball income. Only three states (I think) of those in which he played did not have a personal income tax; they were Washington, Texas, and Florida. They accounted for perhaps 15% of the away games that Mr. Dudley played, meaning that about 85% of the "away" half of his income was taxed by other states. This would be about $4.25 million of taxable income, which at an average rate of six percent (Oregon's income tax is high) equates to an Oregon state income tax credit of about $250,000 if Mr. Dudley had been an Oregon resident, for a net tax to Oregon of $650,000 compared to the $450,000 that he actually paid.
I suppose I'm not seeing what the big issue is in a professional athlete choosing to live where he will pay less in tax; indeed, I'd be surprised if someone with a degree from Yale in economics didn't work that out for himself. As Lord Tomlin said in a famous British judgment of 1936: "Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate acts is less than it otherwise would be," Mr. Dudley among them.
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