The Oakland A’s have another disadvantage when pursuing free agents on the open market
The plight of Billy Bean and the small market Oakland Athletics was highlighted in Michael Lewis’ 2004 book Money Ball. The stakes are different today and Bean’s biggest challenge comes from the state of CA rather than the large market teams in the League.
California’s income tax structure has created a burden for its home teams: the state’s maximum income tax rate for 2013 is 12.3% with an additional 1% Mental Health Service Tax on income of over $1 million. Of the 14 states that impose income tax on MLB players during the 2013 season, CA’s tax rate is 5.45% greater than the next closest, MN.
In my January 23rd article A Peek at MLB’s 2013 Jock Tax Index, I showed that Tampa Bay has the lowest tax liability while CA teams face growing disparity. That article compared all 30 MLB tax situations and concluded: CA’s state income tax burden sets the five CA teams apart from the rest of the league.
Although the A’s have abandoned the concept of competing with big market teams in signing high profile free agents on the open market, CA’s tax burden still affects the team’s ability to compete against even small market teams when signing second tier free agents.
The A’s rank 28th out of the 30 teams in Jock Tax Index (JTI) for the 2013 MLB season with a JTI of 1.234. A player on the A’s earning the league average ($3,213,479) this upcoming season will net $1,683,862 compared to a player on the Minnesota Twins who would net $1,746,063. In other words, a player on the A’s will net $62,201 less than one who plays for the Twins, so the A’s need to compensate him an additional $128,603.43 to make an equal offer.
The chart below lists the five smallest markets and compares their JTI rank to the Oakland Athletics.
RankTeamIndexDifference28Oakland A’s1.123397–21Milwaukee Brewers1.063840$191,385.1718Cincinnati Reds1.053299$225,258.4517Kansas City Royals1.051785$230,123.667Pittsburgh Pirates1.028437$305,151.971Tampa Bay Rays1.000000$396,533.67
The A’s are at a distinct disadvantage even when competing with the smallest market teams. So how much of a premium do the A’s need to pay for a second tier free agent? To answer that question, let’s look at the A’s payroll. Last year the A’s surprised many by signing Cuban outfielder Yoenis Cespedes to an unrestricted free agent contract that ESPN reported was $36 million over four years with his 2013 salary $8.5 million–the highest on the A’s current roster.
The chart below shows the A’s need to pay a premium compared to the other small market teams by offering a player of Cespedes ability anywhere from $506,235 more than the Brewers to as much as $1,048,875 more than the Rays.
TeamSalaryDifferenceOakland A’s$8,500,000.00–Milwaukee Brewers$7,993,765.50$506,234.50Cincinnati Reds$7,904,167.00$595,833.00Kansas City Royals$7,891,298.00$608,702.00Pittsburgh Pirates$7,692,840.00$807,160.00Tampa Bay Rays$7,451,125.50$1,048,874.50
Conclusion
Over the past several years the A’s have realized they can’t match the spending behavior of the more profitable baseball clubs in MLB. And now the A’s face the growing income tax gap between their state and all others in the MLB, which forces the A’s to pay a premium to keep their players and attract free agents to Oakland. This premium ranges from $128,603 for a player making the league average to $1 million for a second tier free agent such as Yoenis Cespedes.
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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