Zion Williamson (right) with teammate RJ Barrett in December 2018. Photo by Keenan Hairston.
Zion Williamson will find out in a couple of weeks where he will begin his NBA career. This rising star should remember that the benefits of a particular location can extend beyond its glamour on the surface – or lack thereof.
Williamson, Duke University’s star player, is slated to be the No. 1 pick in this year’s NBA draft. Based on the results of the recent NBA lottery, he is almost certain to be selected by the New Orleans Pelicans. David Griffin, executive vice president of basketball operations for the Pelicans, is hoping that using the team’s No. 1 pick in the draft to secure Williamson will entice their current star player, Anthony Davis, to stay with the team. Davis has another season remaining under his existing contract with the Pelicans but demanded in January that the team trade him. The L.A. Lakers failed to successfully negotiate a trade for Davis before this season’s trade deadline. Sources reportedly say that the Pelicans winning the top spot in the draft has not changed Davis’ stance on wanting out of New Orleans.
For the last couple weeks following the draft, it seemed that the Pelicans had more to worry about than Davis’ possible departure. Although Williamson knew New Orleans could win the first pick in the lottery, many believe that he had his hopes set on the New York Knicks winning first choice so that he could call Madison Square Garden his home court. As long as Williamson refrained from selecting a sports agent or signing a shoe deal, he remained eligible to play college basketball as long as he withdrew from the draft before the June 10 deadline. (The draft will be held on June 20.) Rather than go to New Orleans, in theory Williamson could have returned to Duke and played another season under coach Mike Krzyzewski.
Despite much speculation, Williamson was always unlikely to postpone the start of his NBA career, even though New York did not win the top draft pick. For one thing, his stepfather said so in an interview following the lottery. And as of this morning, CAA Sports announced that it will represent Williamson, putting this speculation to rest.
While Williamson had a variety of reasons to start his NBA career now, one major factor was likely the financial benefits. As the No. 1 pick in the upcoming draft, Williamson will receive a guaranteed two-year contract worth about $20 million under the NBA rookie salary scale. New Orleans will have an option for his third and fourth years of play, which could translate into around $45 million in salary during his first four years in the league. Because of the salary limits the NBA places on rookie contracts, Williamson and other “one and done” college players entering the draft should want to start the clock on their rookie deals as soon as possible. This allows them to move sooner to their (presumably much more lucrative) second contract, which could pay upwards of $30 million plus per year.
Even more important than his rookie contract is the amount of money Williamson can earn off the court through a sneaker deal and other endorsement contracts. Sonny Vaccaro, a major sports marketing executive, predicted Williamson could break records with a shoe deal worth as much as $100 million. Such contracts are not available to NCAA players. Further, extending his college career would have represented risk. Williamson could have sustained an injury that dropped him to a lower pick in next year’s NBA draft, or even ended his career. Last year, he dodged this very outcome when a knee injury – suffered when his foot burst through the sole of his sneaker during a game against the University of North Carolina – turned out to be much less severe than initial reports suggested.
No matter where he plays, Williamson is financially better off starting his NBA career right away. And, at least from a financial standpoint, New Orleans is not only as good a place to play as New York – it’s better.
Louisiana’s state income tax rate tops out at 6%. New York State’s top rate is 8.82%. If Williamson lives in New York City, he can expect to pay another 3.876% on top of that. The Lakers ended up with the fourth pick in the draft, but it is possible Williamson also hoped to go to play with LeBron James. If so, he should note that living in California would expose him to a top rate of 13.3% as an earner who makes more than $1 million per year. Over the course of four seasons, the tax savings from playing and living in New Orleans rather than New York City or Los Angeles could be a few million dollars based on Williamson’s projected NBA salary alone. When you factor in the extra endorsement income he’ll receive during those years, the tax savings translates to millions more.
As a financial adviser, I recommend that Williamson establish his domicile in a tax-friendly state like Florida, wherever he ends up playing. Besides the warm weather, Florida has the advantage of imposing no state income tax. Even though he wouldn’t be playing for the Miami Heat, Williamson would still enjoy the tax benefits, especially on the income he earns off the court. That’s because your domicile – the state where you establish your permanent, primary home – can theoretically tax all your income, while states where you are not a resident only tax the income you earn within their borders.
Establishing a domicile is especially challenging and important for professional athletes, who spend a lot of their time on the road. Some states, including New York and California, are notoriously aggressive about challenging the domicile of nonresident high-income earners who maintain homes in their states by conducting residency tax audits. There is no one clear-cut test for domicile, so tax authorities look for a variety of other factors: Where do you store belongings that have sentimental value? Where do your pets live? Are you involved with a faith community in the area? Where do you vote? If you have children, where do they attend school? No one factor can prove or disprove domicile, but the more evidence that supports a claim, the better.
If the Pelicans draft Williamson, he may or may not decide to pursue domicile in an income-tax-free state. But at a minimum, I would recommend that he avoid purchasing homes or renting apartments in high-tax states where he will play during the season. Instead, he should stay at hotels when he visits to limit the amount of “jock tax” he must pay states like New York and California for team-related work days, practices, team meetings, training camp and exhibition games. He will play half of an 82-game regular season at home. So even domiciled in Louisiana, it would be better to pay 6% on most of his income than to pay more than double that amount if either New York or California claimed him as a resident.
As a Duke alum and a die-hard Duke basketball fan, I am excited to see Williamson play in the NBA next year. And although I was born and raised in New York City, I think Williamson is better off playing for New Orleans. Some fans would argue that Williamson could further his brand more effectively in the Big Apple. But Williamson already has 3.3 million Instagram followers and plenty of media attention. The opportunities will follow him wherever he goes, and so might some of the NBA all-stars entering free agency. Besides, I wouldn’t wish the Knicks organization on any player, considering how poorly ownership has run the team since Patrick Ewing was traded in 2000. The tax benefits of living in Louisiana would be the proverbial cherry on top.