Former New York Yankee Robinson Cano’s free-agent signing with the Seattle Mariners this past December illustrates how state tax policies can influence professional athletes in their contract negotiations. While all athletes incur federal tax liability on their earnings, their exposure to state and local taxes will be dictated by the income tax policy for their home team’s state and the team’s road schedule for the season. This coming season, Major League Baseball (MLB) players could have to pay taxes in up to 14 states and seven cities, and each team will have associated with it distinct tax liabilities for its players because of where the team is based.
The Jock Tax Index (JTI)
The JTI measures how much a team’s location dictates the tax burden on an athlete because of the jurisdiction’s income tax policies. It ranks each of the 30 MLB teams according to the federal, resident and nonresident state, and city income tax liability based on the 2014 game schedule.
Using the guidelines outlined in my article “When is a CPA as important as your ERA?,” published in the Spring 2009 issue of Marquette Sports Law Review, the JTI assumes each individual will earn the 2014 league average ($3,390,000), file as “single,” and not miss any games. The only deductions assumed taken on Schedule A of the federal return (“itemized deductions”) are state income taxes paid during the year, and itemized deductions are phased out for large income taxpayers.
Given that this is the second year in a row in which I have analyzed the salaries for 30 teams, we can not only analyze the information with respect to how each team compares to each other but also whether there has been any significant change in tax exposure for each team and for the entire league and, if so, how much.
As was the case last year, players for the Tampa Bay Rays have the least income tax liability exposure. A member of the Rays can expect to realize the greatest percentage of his income after taxes, earning the league average and realizing 57.26% of his income, for a JTI of 1.000. In contrast, a member of the San Francisco Giants earning the league average can expect to realize only 50.33% of his income after taxes, for a JTI of 1.1376.
We can use the JTI to compare extreme differences between the Rays and the Giants. With a JTI of 1.1376, the Giants would need to offer a player earning the league average in Tampa a salary of $3,856,380—or $466,380 more—to play in San Francisco in order for his after-tax take-home pay to be equal.
There are two issues to keep in mind:
Everyone’s paying more taxes.
First, the increased tax rates at both the federal and state level, along with the phaseout of itemized deductions, continue to increase the effective rate of an athlete’s income tax. Despite the fact that the average salary in MLB increased over the previous year by 5.49%, the overall net income increased by only 1.81%. This is due to the fact that, over the past year, the average federal income tax increased by 10.98% while state and city income tax increased by 5.79%.
Even the Rays’ JTI, which remains the best in the league since 2006, when I first compared the effect of state taxes on athletes, means that Rays players take home less than they did in previous years. A member of the 2014 Tampa Bay Rays will take home $181,242.28, or 8.54%, less income than a team member in 2006.
Disparity of California tax continues.
Second, the disparity between the five California teams and the rest of the league continues to grow. Of the 30 MLB teams, the five California teams have the highest JTI, which is a direct reflection of the state’s maximum income tax rate of 12.3% and an additional 1% Mental Health Service Tax on income of over $1,000,000. The Giants’ JTI increase from 1.1235 in 2013 to 1.1376 in 2014 means there is an 11.42% increase in the cost to play in San Francisco in comparison to playing for the Tampa Bay Rays.
The JTI disparity should make California consider the tax ramifications when pursuing free agents. Prior to the end of the season the Giants extended Hunter Pence’s contract for 5 years and a total cost of $90 million, taking him off the market before he became an unrestricted free agent. What premium did the Giants need to pay Pence to win him over from some of his potential suitors?
Considering that the Texas Rangers, Philadelphia Phillies, and the New York Mets and Yankees all signed free-agent right-fielders this past off season, we can assume that each team would have had some interest in Pence. Based on the 2014 JTI, the Rangers could have offered Pence $15,681,698 (or $2,318,302 per year) less than $90 million five-year contract he secured with the Giants in order for Pence to realize the same after-tax net earnings.
5 Year Contract Salary
($) Difference in Compensation
(%) Difference in Compensation
San Francisco Giants
New York Mets
New York Yankees
The Rangers could have offered Pence $78,408,488 or 12.88% less over the same five year time period, while the Phillies could have offered him 8.63% less, and the Yankees and Mets could have offered him 4.87% and 4.59% less, respectively.
Although the disparity is greatest when comparing the five California teams with the other 25 teams in the league, each team’s individual income tax consequences, as indicated by the JTI, indicates some disparity between all the teams in terms of what a player actually takes home after taxes. Consider for example this past off-season’s signing of Robinson Cano to a ten year $240 million contract with the Seattle Mariners; Robinson’s former team, the New York Yankees, would have needed to offer the All-Star second baseman nearly $21 million more ($20,959,423) in order to equal the after-tax net of the Mariners’ offer.
TeamsJTIContractYankees’ JTIContract DifferenceMariners1.00102$240,000,0001.08835$260,959,440.00
The JTI is a new proprietary tool exclusive to AFP Consulting and has been featured in “Off the Charts” by Scarlet Fu on Bloomberg Television’s Market Crashers. It gives us a practical way to evaluate how the tax burden for each team’s players in 2014 compares to the 29 other teams in MLB. In 2014, all teams will face a greater tax burden, although the JTI shows the increased tax burden is disproportionately higher for the five California teams, whose tax burdens have grown at a greater rate.
ALAN POGROSZEWSKI is an Assistant Professor of Sports Studies at St. John Fisher College and the President of his own tax consulting business whose clientele include professional athletes performing services on three separate continents. Prior to accepting his position at St. John Fisher College, Mr. Pogroszewski was the Vice President of Business Operations for Sports Consulting Group, a firm that specializes in the representation of professional hockey players. Mr. Pogroszewski received his M.B.A. from Rochester Institute of Technology in 1996 and his M.S. in Taxation from St. John Fisher in 2003.
©2014, Alan Pogroszewski. All Rights Reserved.