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LeBron James had a vastly higher tax rate than Los Angeles Clippers owner Steve Ballmer.
According to an investigation released Thursday by ProPublica, James' tax rate on his 2018 income was nearly triple that of Ballmer’s despite making 19% of what Ballmer made that same year.
James reported $124 million in income three years ago and paid a federal tax rate of 35.9%. Ballmer, the former Microsoft CEO, told the IRS that he made $656 million. He paid $78 million in federal taxes, a rate of 12%.
James, meanwhile, paid over $44 million in taxes on reported income that was $532 million less than Ballmer's reported income.
How did Ballmer get away with paying far less in taxes relative to James? An accounting trick that many other professional sports team owners use. From ProPublica:
Ballmer pays such a low rate, in part, because of a provision of the U.S. tax code. When someone buys a business, they’re often able to deduct almost the entire sale price against their income during the ensuing years. That allows them to pay less in taxes. The underlying logic is that the purchase price was composed of assets — buildings, equipment, patents and more — that degrade over time and should be counted as expenses.
Owning a major professional sports franchise in the United States is an incredibly lucrative business. Franchise values have skyrocketed in recent years. If you want to own a team in the major four sports leagues, you need to have billions, not millions.
The Clippers are one of the most lucrative franchises in sports, too. The team is in a major market and has been successful since Ballmer bought the team in 2014 for what was a record price of $2 billion. Ballmer has been able to decrease his tax rate because of that high purchase price and the fact that the Clippers have reported operating losses.
But IRS records obtained by ProPublica show the Clippers have reported $700 million in losses for tax purposes [from 2014 to 2018]. Not only does Ballmer not have to pay tax on any real-world Clippers profits, he can use the tax write-off to offset his other income.
How franchise owners use amortization
The ProPublica report is a fascinating look at how team owners can use their franchises to pay less than they otherwise would in taxes. The outlet said it reviewed "dozens" of tax returns of team owners and revealed that owners across all sports are paying less in taxes relative to athletes.
That tax cut is because of a standard accounting practice of amortization and a 2004 tax cut by then-President George W. Bush. The 2004 tax cut allowed pro sports team owners to vastly expand the scope of what they could and couldn't write off on their tax returns. Someone who purchases a team — or an asset — is able to write off a whole host of things involved with the operations of the team. That includes player contracts.
Team owners have been free to legally write off much more than they had in the past. And that leads to lower tax rates. According to the report, Ballmer saved approximately $140 million on his taxes in that five-year span that the Clippers reported $700 million in operating losses.
Carolina Panthers also report losses
The Carolina Panthers are the most recent NFL team to change hands. David Tepper bought the team in 2018 and paid over $2.2 billion for the team.
In the final years of original owner Jerry Richardson's tenure, the Panthers reported operating profits because the amortization period was up. Now that the franchise changed hands, Tepper can take advantage of the ability to amortize his purchase price and report losses even as NFL revenue continues to grow.
The team swung from a large taxable profit before its sale to a tax loss of about $115 million, according to a ProPublica analysis of IRS records, after Tepper’s purchase in 2018. There’s no evidence anything significant about the Panthers’ real-world revenue and expenses changed between 2017 and 2018. The only major difference is the team changed hands, and Tepper now gets a tax benefit through his new entity, Tepper Sports Holdings.
Tepper’s hedge fund is a massive producer of capital gains income — in the past decade, he has often reported more than $1 billion in annual income — so the tax losses produced by the Panthers are extremely valuable to him. A spokesman for Tepper didn’t respond to questions.
Public opinion strongly favors taxing rich at higher rates
To put Ballmer’s 2018 tax rate into perspective, the current marginal tax rate for people making between $9,876 and $40,125 is 12%. Those who make more than $40,125 have every dollar above that up to $85,525 taxed at 22%. There’s a pretty good chance that you, the reader, paid a significantly higher federal tax rate in 2018 than Ballmer did.
That’s a big reason why public opinion favors closing tax loopholes similar to the ones that Ballmer and other professional team owners use to pay less in taxes. According to an April Yahoo News/YouGov survey, 65% of Americans want loopholes closed that allow corporations to put their money in offshore banks while 15% want to keep those loopholes. And 51 percent want the corporate tax raised for proposed infrastructure improvements.
While those two questions don’t directly address what professional sports team owners are doing to lower their taxes, it makes it very likely that a majority of Americans aren’t too keen on how billionaires are saving money via their sports franchises. Even if the practice is perfectly legal.
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