Professional athletes get hit hard: they pay federal and resident state income tax plus nonresident state and city tax as well. This coming season, Major League Baseball (MLB) players could have to pay taxes in up to 14 states and seven cities.
Introducing: the Jock Tax Index (JTI) for comparing tax burdens between teams
The JTI measures how much a team’s location and jurisdiction’s income tax policies dictate the tax burden on an athlete. It ranks each of the 30 MLB teams according to their federal, resident and nonresident state, and city income tax liability for the 2013 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 2013 league average ($3,213,479), file as single, and not miss any games. The only deductions taken on Schedule A of the federal return are state taxes paid during the year.
In analyzing the 2013 season, the Tampa Bay Rays have the least income tax liability. A member of the Rays can expect to keep the greatest percentage of his income, earning the league average and keeping 58.87% of income for a JTI of 1.000. In contrast, a member of the San Francisco Giants earning the league average can expect to keep only 52.42% of income for a JTI of 1.1235.
So we can use the JTI to compare extreme circumstances between the Rays and the Giants. With a JTI of 1.1235 the Giants would need to offer a player earning the league average in Tampa a salary of $3,610,271 or $396,790 more to play in San Francisco for their after tax take home be equal.
Two issues to keep in mind:
Everyone pays more taxes now
First, the increased tax rates at both the federal and state level continue to take a greater percentage of an athlete’s income. Although the Rays’ JTI remains the best in the league, as it was in 2006 when I originally examined the effect of tax on athletes, a member of the 2013 team will take home $119,863 or 3.73% less income than a member of the Rays in 2006.
CA needs to level the playing field
Second, the disparity between the five CA teams and the rest of the league continues to grow. Of the 30 MLB teams, the five CA teams have the highest JTI, which is a direct reflection on the state’s maximum income tax rate of 12.3% and a 1% Mental Health Service Tax on income of over $1,000,000. In 2013 the Los Angeles Angels of Anaheim’s JTI of 1.1232 is nearly four points greater than the next closest team: the Minnesota Twins and represents $127,976 less in take home, which is a 76.6% increase from 2006.
The JTI disparity should make CA teams take their tax situation into consideration when pursuing free agents. This past winter both the Los Angeles Dodgers and the Angels signed highly sought after free agents. In the Dodgers case with pitcher Zack Greinke, they only had to outbid their neighbors to the South in Anaheim. The Dodgers’ JTI of 1.1234 is about the same as the Angels’ 1.1232, so each offer could be taken at face value.
In the second scenario, when the Angels’ signed Josh Hamilton away from the Texas Rangers, a large tax discrepancy was in place with the two competing teams. According to the 2013 JTI, Hamilton’s $125 million deal over five years equals a $15,400,249 ($3,080,050 per year) difference between playing with the Rangers versus with the Angels. For the after tax take home to be equal, the Rangers could have offered Hamilton $109,599,751 over the same five year time period.
Although the disparity is greatest between the five CA teams and the other 25 teams, each team’s individual income tax consequences, as indicated by the JTI, causes a disparity in what a player actually takes home. Using the example of this off-season’s signing of Kevin Youkilis to a one year $12 million contract with the New York Yankees, we can show that Youkilis’ former team, the Chicago White Sox, could have offered the third baseman nearly one million less ($11,065,021) than the Yankees’ offer.
The JTI is a proprietary new tool exclusive to AFP Consulting. It gives us a practical way to evaluate how each team’s tax burdens in 2013 compares to the 29 other teams in MLB. In 2013, all teams will face a greater tax burden, although the JTI shows the increased tax burden is disproportionate as the five CA teams’ burdens have grown at a greater rate.
For more information about the JTI and other jock tax issues, please click here to sign up for my newsletter or contact me directly.
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