LeBron James’ Savvy Tax Move

Is basketball star LeBron James’ departure from Cleveland to Miami a municipal bond story? It may be: James faces a 5.29% personal income tax rate in Ohio compared to no personal income tax in Florida. Also, Mr. James is actually part of a decades-long population trend. After the City of Cleveland’s population peaked in the 1960s, it has experienced a steady outflow of residents to this day. Today, the City is about half its peak size, with a population of 430,000. 

LeBron is far from the only sports star fleeing to low taxation states.  California has been steadily losing population to nearby Nevada, another state with no income tax.  California, along with labor friendly states like New York and Illinois hammers its most sucessful earners with a tax rate of 9.3%,yetis far from balancing its budget.  Most counties and cities in the state are in financial trouble as well, and there is one common denominator: California is the Golden state for public employees.  Over the past twenty five years, traditional pensions have all but disappeared from the private sector.  Today only about 12% of private sector workers can look toward a guaranteed pension at retirement.By contrast, 90% of public sector employees can look forward to a steady monthly income when they leave their challenging government jobs.  Public employee

 

unions have done a superb job of convincing the electorate to vote for their friends.  The teachers warn of overcrowded classrooms, the cops and firefighters tell us we will be endangered by any reduction in public safety spending. What they don’t want to mention is that many of them have talked elected decision makers into granting them gold plated pensions. Certainly I do not deny the importance of their jobs to society, but the benefits that have been promised to public employees have far outdistanced anything a mechanic, an accountant or an aeronautical engineer can hope for. In a previous newsletter, I mentioned my friend’s brother, who retired from  a Bay area fire chief’s job with a pension for life of well over $200,000 a year…he was 50 years of age when this lifetime sinecure began flowing his way, courtesy of taxpayers!  While perhaps the exception, in fact six figure pensions are not at all uncommon and today’s public work force.  A few years ago the Supervisors of conservative Orange County, California agreed to allow sheriffs to retire after 30 years service with 90% of pay.  In addition, this benefit was based upon the last year of earnings, allowing for gross manipulation. Pension “spiking” is a well known ruse among public employees. With a wink and a nod, those in their last year on the job are assigned large amounts of overtime, or allowed to convert unused vacation time into additional income, goosing pensions to levels often greater than their normal pre-retirement earnings.

Complicity is practiced by elected officials who promise a golden age of retirement in the future, then fail to build reserves today, something that would require higher taxes.  The payoff for politicians? Union financial support for their election, and for the accrual of fat pension benefits for those elected!

Because California’s constitution forbids the state from declaring bankruptcy as a means to void pension promises, a financial burden of Frankensteinian proportions hangs over the state, causing layoffs, shortened work weeks and facility closures, as one of the few responsible officials, Governor Schwarzenneger attempts to force the legislature to face up to its responsibilities.

I know many clients may disagree with my analysis, but in recent weeks I’ve invested a great deal of time studying the issue.  States with high tax burdens cannot hope to compete successfully with states who allow their people to keep more of what they earn.  

LeBron James, a young basketball player, may just be more tax savvy than a certain financial advisor who remains resident in one of the highest tax burden states.