November 27, 2014

Entrepreneurship, Taxes and Orange Spheres

Entrepreneur JamesPerhaps you noticed that Ohio recently lost a successful entrepreneur who moved his business to Florida, where taxes are lower.

Of course, like many entrepreneurs who relocate their businesses to low tax states, his decision was only partially influenced by taxes. Other factors, specifically his desire to build a global brand name, were more important. But Ohio taxes didn’t help.

Yes, I’m talking about LeBron James’ decision to join the Miami Heat.

Basketball isn’t my forte, so I’m going to stay away from evaluating whether James would have been more likely to win an NBA championship if he’d stayed in Cleveland, gone to New York, or chosen somewhere else to play.

Instead, I’m going to focus on how differences in state income taxes in Ohio and Florida might have influenced his decision to relocate his business – at least at the margin.

Let me start by pointing out that LeBron James is an entrepreneur. Like many Americans, he both works for someone else and has his own business. Or in his case, I should say businesses. Among James’ companies are LRMR Marketing, a sports marketing business he created in 2006, and King James Inc., which contracts with companies seeking his endorsement, and owns stakes in other ventures.

James isn’t just any old entrepreneur, he’s a savvy one. As a 2007 CNNMoney article said, “Instead of just lining up endorsements and cashing checks, James is seeking equity in the companies he works with; and he is using his on-court prowess to build a corporation that deals with entities as disparate as Bubblicious and Warren Buffett.”

James’ entrepreneurialism brings me to his decision to move. In describing it, James said, “This is a business.”

Perhaps, like many entrepreneurs, James was thinking about where his business would be most successful.

Moving his business operations to Florida will save James a lot of money. According to the Sportslaw blogspot, King James Inc. earns approximately $28 million a year in endorsements. By moving to Florida, which has no state income tax James will save about $1.7 million per year in taxes on his endorsement business.

Don’t think that James doesn’t pay attention to the effect of taxes on his business activities. According to CNNMoney, his decision to create King James Inc. to deal with endorsement partners saved him a bundle in taxes. As I said, we are talking about one savvy entrepreneur here.

So, like many entrepreneurs, James probably considered the tax benefits of relocating his business to Florida. According to Brian Windhorst of the Plain Dealer, Miami Heat President Pat Riley seemed to think so. Windhorst writes, “Riley knew the lack of a state income tax in Florida could help him sell [the decision to move to Miami]. [He] had his salary-cap specialists create displays to show how Florida taxes could save James money.”

Now back to my initial point about Ohio’s loss of a successful entrepreneur. The state doesn’t have that many of them to lose. According to data from Ohio tax authorities, only slightly more than 3,000 Ohio corporations generate the level of revenue that King James Inc. brings in annually.

State officials are often interested in economic impact numbers. And James’ are high. Before James made his decision to move, the Freakonomics blog estimated that “Cleveland and the state of Ohio might be hundreds of millions of dollars better off if LeBron stays put.”

The state of Ohio spends a lot of money on incentives to get entrepreneurs to start businesses in Ohio. But, paradoxically, we have tax policies that encourage the successful ones to move elsewhere.

LeBron James is perhaps the most famous Ohio entrepreneur to relocate to a lower tax state in recent years. But many less well known ones have also moved.

Perhaps the departure of King James Inc. will lead the governor and state legislators – some of whom undoubtedly are fans of both basketball and economic impact studies – to recognize that having higher taxes than many other states is leading to the loss of Ohio entrepreneurs we should be working hard to keep.

Image credit:  Keith Allison on Flickr under a Creative Commons Attribution-sharealike 2.0 license, via Wikicommons

8 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

8 Reactions

  1. Scott,

    Thanks for providing this interesting take on Lebron’s move.

    I’m going to disagree with you on one thing, though;

    I don’ think that the The $1.7 Million in tax savings was even on Lebron’s radar for more than about a minute. He has more money, and will have more money, than he’ll probably be able to ever spend.

    As you know Scott, I’m a Clevelander. His decision has to do with winning. The other thing is that we now live in a medium market (at best)area. People are moving away from, not to-Cleveland.

    We’re sitting in an old-style industrial city, with leaders that are stuck in the 70’s. It’s old school politics here, combined with an old school mentality. Lebron probably didn’t feel that Cleveland was a big enough market for him.

    Unfortunately, there’s very few people here that actually have the power to move us into the modern era.

    Until Cleveland gets some leaders that have some…well, I’ll call it courage, nothing will ever change here.

    The Franchise King

  2. Gee, Joel, I’d say a winning attitude starts with people like you and me.

    A long time ago I read a book about how to become a millionaire. The name of the book escapes me now. But one thing the author said has stayed with me, years later. Paraphrasing, he said: “If you think you have to move somewhere else to achieve your dreams or be a winner, you’re just kidding yourself. There are opportunities in your own back yard if you open your eyes and see them. A committed person makes it happen no matter where.” And he was right….

    Now the tax issue is a different thing. That’s a calculated business issue.

    But the winning, well, I have to agree who someone else who said that LeBron is deep down a quitter who wants to lay blame elsewhere for his inability to win at the level he hoped for. He’s just kidding himself if he thinks he has to go somewhere else to win a championship. And that goes for all the mealy-mouthed losers who are in office in the area, constantly whining about how bad things are, instead of doing something proactive about it.

    At the end of the day, the biggest factor in success is the 6 inches between your two ears.

  3. So basically, James could take a deal worth less money in Miami and still make as much after taxes? Sounds to me like Ohio’s tax laws just gave Miami more cap room.

  4. Got to go with Anita on this one. As I say to my 6 and 4 year olds, just think how much you could have got done in the time you’ve spent whining about your bad fortune.

  5. Anita,

    Attitude certainly has a lot to do with it, but so does reality.

    Last year, I had to change my business model; I used to only work with local area residents who wanted my help in finding opportunities in franchise ownership.

    My mistake (and I own this mistake) was that I refused to see that there just weren’t as many opportunities for me to help local area residents as there were back in the 90’s, when my dad was running our business.

    Because of how my business is structured, I was able to branch out, and I now help folks all over the USA. That’s a good thing.

    In the sporting world, perception is pretty important. Big names either don’t stay with Cleveland for too long, or just don’t even bother putting our city on their radars.

    It’s too bad. You and I know some really smart, driven people here that don’t get the publicity they deserve for what they are doing.

    There are cool technology projects going on in our own backyards. Heck, Toledo of all places, is forging ahead with a huge push to become the capital of Solar Panel manufacturing. Youngstown, just to the east, has a strong and driven young Mayor, who’s focused on small business. Why don’t we have one?

    We don’t have a strong leader here, and haven’t for a long time. We have some business “leaders,” but not the type that will make enough waves to actually change our culture.

    I think that our area is a pretty good place to live. The cost of living is pretty low. (Although, lately it doesn’t feel like it) Our lake is pretty nice. We have Playhouse Square, and The Cleveland Orchestra.

    Finally, I wrote an op-ed (so did my 14 year-old daughter) over at http://www.NEOBizblog.com about Lebron. In it, I stated that I didn’t feel that Cleveland had anything to show for the hundreds of millions of dollars (supposedly) that Lebron’s presence brought here over the past 7 years. I stand by that.

    The Franchise King

    • Hi Joel, I too think Northeast Ohio is a pretty good place to live. I will agree with you that we shouldn’t be relying on one sports figure to make or break the area. Let’s celebrate all the other contributions to this economy here. :)

      Anita

  6. This is an interesting thread to follow. I enjoyed my student time in the “Live Free or Die” state of New Hampshire without an income tax, but I also enjoyed my working time in Troy, Ohio.

    Joel: Would you coin a new phrase for Cleveland? From “Cleveland Rocks” to…?

    Anita: I look forward to visit your part of Ohio and other parts of the United States of America.

  7. It’s always personal. Any time someone says it’s not personal, it’s business is just telling you it’s no longer either with you.

    Sometimes you have to leave home. People’s expectations of you hold you back. But that’s not the case with LeBron.

    I have a hard time understanding how a superstar like LeBron thinks sports is not personal. If that’s what he thought, that it’s not personal, when he thinks about the team that took him as an unproven high school graduate, gave him millions, and the fans who attached their hearts and days and years to his seeming devotion to them and their city….then he doesn’t understand this business of the NBA.

    Good luck to him. I hope it works out for him. I think he’s a good person at heart, who’s young and surrounded himself with people offering bad advice.

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