After his tournament his weekend, Phil Mickelson hinted that he’s considering, believe it or not, changing his behavior in response to tax incentives. ESPN reports:
“It’s been an interesting offseason,” Mickelson said Sunday after the final round of the Humana Challenge. “And I’m going to have to make some drastic changes. I’m not going to jump the gun and do it right away, but I will be making some drastic changes.”
The 42-year-old golfer said he would talk in more detail about his plans — possibly moving away from California or even retiring from golf — before his hometown Farmers Insurance Open, the San Diego-area event that starts Thursday at Torrey Pines.
“I’m not sure what exactly, you know, I’m going to do yet,” Mickelson said. “I’ll probably talk about it more in depth next week. I’m not going to jump the gun, but there are going to be some. There are going to be some drastic changes for me because I happen to be in that zone that has been targeted both federally and by the state and, you know, it doesn’t work for me right now. So I’m going to have to make some changes.” . . .
Mickelson resides in California, which recently hiked its top income-tax rate from 10.3 percent to 13.3 percent. Unfortunately, one has to quibble with his 19th-hole math:
“If you add up all the federal and you look at the disability and the unemployment and the Social Security and the state, my tax rate’s 62, 63 percent,” said Mickelson, who lives in Rancho Santa Fe. “So I’ve got to make some decisions on what I’m going to do.”
If you add all of those rates to the new top 39.6 percent federal rate, I suppose you might get something like 63 percent, but that’s not how taxes work. Payroll taxes, unemployment-insurance taxes, and state-level disability-insurance taxes are all subject to caps over which they’re no longer assessed (the Social Security wage base is $113,700 in 2013). Therefore, there’s no dollar of income on which Mickelson will pay payroll tax in addition to a federal income-tax rate over, say, 30 percent, or, for that matter, also a 13 percent state tax.
If he’s deciding to play a tournament or do a sponsorship that will make his income $10.5 million rather than $10 million (or any added income over $1 million, California’s top bracket), the taxes assessed on that extra $500,000 income would actually be the combination of the 13.3 percent state income tax, the 39.6 percent federal income tax, and the 2.35 percent top Medicare tax rate (recently increased by Obamacare). The combined top statutory rate, then, would be 55.25 percent on every dollar Mickelson earns over $1 million. But because state taxes are deductible against his federal tax bill, by my calculations Mickelson would actually be paying an effective 50 percent top marginal rate (leaving aside the fact that having KPMG as a sponsor and giving very generously to charity means his real rate is probably lower).
So even if his math landed in the rough, Mickelson is still paying an appallingly high marginal tax rate on playing golf every weekend this year, though his rate in 2012, by my calculation, was a not much less onerous 43 percent. It’s obviously possible that Mickelson chose to enter the marginal tournament, so to speak, where he’d pocket 57 percent of his earnings, but really has crunched the numbers and would rather spend time with his family if he’s only keeping 50 percent, but it seems somewhat unlikely. More important is the fact that Mickelson could easily reduce his tax burden by moving to another state — indeed, by my simplistic model, if he moved to a state with no state income tax, he could actually pay a marginal tax rate on income over $400,000 of 42 percent, lower than he would have in California in 2012.
There’s a reason lots of professional golfers reside in zero-tax states such as Florida, Georgia, and Texas (New Hampshire and Alaska’s no-income-tax programs have been less successful at attracting PGAers). California says that Prop 30, the recent tax hike, has plugged the state’s budget gap for now, but if a lot of people like Mickelson respond to the tax hikes by moving their residency elsewhere, the state’s budget could soon enough resume melting down like Phil at Winged Foot.
(As an aside, golfers typically also owe income taxes to the state or country in which they win a tournament, but they can credit that against taxes paid to their state of residence, so one can assume Mickelson’s state tax burden is going to be California’s rate, whether he’s playing tournaments there or not. Lastly, I’m assuming that Mickelson can deduct the full value of his California taxes paid on income over $1 million against the 39.6 percent rate he’s paying federally on that income — it’s possible this isn’t quite the case.)