What type of advantage does the NHL expansion team in Seattle have in signing free agents in the open market?
Introduction
This past summer, through the league’s expansion draft, 30 players joined the National Hockey League’s (NHL) 32nd franchise the Seattle Kraken. By joining the Kraken, players contracts will now be paid by Seattle and with no state income tax or jock tax in Washington, most of these players will consider the state their home for tax purposes. The state of Washington is one of only nine states in the United States with no state income tax. The others with NHL teams are Florida, Nevada, Tennessee, and Texas, which provides the teams located there an inherent financial advantage as their players will take home a higher percentage of their salaries.
Contracts in Terms of True Value
While teams and representatives negotiate the total salary of a contract, I’ve stressed in several previous articles that it’s the true value after tax that is of greatest importance.
All athletes incur federal tax liability on their earnings, their exposure to state and local taxes will be dictated by a team’s home and road schedule. For example, this upcoming season, a player in the National Hockey League (NHL) will potentially play in 24 US jurisdictions while also playing in four additional Canadian provinces. By analyzing each team’s home and away schedule a player’s unique tax liability can be determined.
To measure the advantage the Krakens’ players will receive for playing in Washington, we first need to determine the team’s schedule for the upcoming season. Although the Kraken are not exposed to any resident tax in Washington, they will be taxed as non-residents on any road games played in a state or city that levies tax. Therefore, knowing where Seattle will play their road games will determine a player’s exposure to non-resident tax.
Quantifying the Advantage
When looking at Seattle’s schedule, it can be determined how many ‘duty days’ their players will perform in each state and subsequently how much income will be earned and subject to non-resident tax.
Philipp Grubauer
One unrestricted free agent who signed with the Kraken, is goalie Philipp Grubauer. As a benchmark, we also included scenarios of him re-signing with his former team in Colorado and the Buffalo Sabres to emphasize the tax benefits Seattle offers.
In comparing Grubauer’s after-tax value on this potential contract proposal with the Kraken to that of the Colorado Avalanche and Buffalo Sabres, the value on his contract is worth $1 million more than the same deal with his current team and over $2.3 million more than the same proposal with the Sabres. Therefore, in order for the Avalanche to match the same after-tax value as the Kraken, they would need to up their proposal to around $37 million and the Sabres would need to offer almost $40 million.
Players Drafted in Expansion Draft
Free agents who sign with Seattle are not the only ones to benefit. Players exposed and selected in the expansion draft by Seattle, in nearly every case, benefited financially. Below, we look at the three highest paid players selected by the team in the expansion draft. These players also come from a team with a beneficial tax situation (Gourde/Tampa Bay Lightning), a team whose tax situation slots in the middle of the league (Giordano/Calgary Flames), and a team with one of the least favorable tax situations (Eberle/New York Islanders).
As the chart above indicates, financially players profited in being drafted by the Kraken. In the case of Jordan Eberle and Marc Giordano their net income increased by 24% and 12% respectively. The economic gain from a player being drafted from another team in a tax-free state is relatively small, as was the case of Yanni Gourde, his gain was less than ½ of a percentage.
Conclusion
Although Seattle has not performed as strongly as the Vegas Golden Knights did in their inaugural season, they can be successful and have the blueprints to follow. Vegas who entered the NHL in 2017 leveraged their tax advantage and the expansion draft to compete right out of the gate. In either being selected in last summer’s expansion draft or by signing as a free agent in Seattle, no “jock tax” makes both dollars and sense to all Kraken players!