Over the past few days both Pablo Sandoval and Hanley Ramirez have signed with the Boston Red Sox and left their former California ball clubs and the state’s 13.3% tax rate behind. A closer look at the numbers shows how this signing not only makes sense on the field but also makes dollars and cents off it.
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. During the 2015 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 2015 game schedule.
As noted in my March 3, 2014 post, the JTI disparity should make athletes reconsidering playing in the state of California and the tax ramifications should they sign there as a free agent. Both Sandoval and Ramirez provide us an example of the premium that both the Giants and Dodgers would need to pay in order to match the net take home of the Red Sox offers.
Pablo Sandoval
The Red Sox offer to Sandoval of $95,000,000 over six years with an Average Annual Value (AAV) of $19,000,000 would have netted him a take home of $51,792,029 over the life of the contract and $10,358,406 annually. In order for the Giants to match the same annual after tax take home as the Red Sox offer they would have needed to offer Sandoval an AAV of $20,579,553
CHART I
Team
Gross Salary
AAV
Difference in ($)
Difference in (%)
Giants
$102,897,763.51
$20,579,552.70
–
–
Red Sox
$95,000,000.00
$19,000,000.00
($7,897,763.51)
-8.31%
As the chart above indicates the premium the Giants would have needed to pay in order to reach the same net take home of $51,792,029 the Red Sox offered would have been an additional $7,897,763.51 or 8.31% more.
Hanley Ramirez
Ramirez Red Sox contract of $88,000,000 over four years with an AAV of $22,000,000 will net him $47,975,775 over the next four years and $11,993,944 annually. In order for the Dodgers to match the same annual after tax take home as the Red Sox offer they would have needed to offer Ramirez an AAV of $23,826,031
Chart II
Team
Gross Salary
AAV
Difference in ($)
Difference in (%)
Dodgers
$95,304,124.96
$23,826,031.24
–
–
Red Sox
$88,000,000.00
$22,000,000.00
($7,304,124.96)
-8.30%
Once again the chart above indicates the premium the Dodgers would have needed to pay in order to reach the same net take home of $47,975,774 the Red Sox offered would have been an additional $7,304,124.96 or 8.30% more.
Conclusion
Rather than viewing contracts on the gross amount, the JTI gives us a practical way to evaluate the net income from competing contract proposals. The JTI provides agents and athletes to take jurisdictions with different tax liability and make a comparative analysis. In the example of Ramirez and Sandoval the Red Sox offer may have made the most sense on the field but by using the JTI the contract each signing seems to also make plenty of cents once you take into consideration the tax liability of the competing offers.
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.