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January 26, 2011

Checking the Numbers

Withholding Aplenty

by Eric Seidman

A couple of weeks ago I discussed “the jock tax” in this space, which is the nickname given to the tax liability incurred by non-residents on income earned away from their home state. The moniker is derived from the simple fact that athletes are much more vulnerable to this tax due to their big salaries and schedules being in the open.

To summarize, baseball players are liable for tax to their state of residence as well as the state in which their team plays. When they travel on the road for games, their salary is prorated to the time spent in those road cities and states and those portions of income are taxed. The units of measurement to prorate the salaries are duty days or games played, which is not uniform across all cities and states. The difference between the two is off days. There are 162 games in a baseball season and around 220 duty days. In baseball, the difference between prorating salary based on games or duty days is minuscule and immaterial, which came in handy for this exercise.

Most states offer credits to their residents for taxes paid to other states, which prevents players from being grossly over-taxed, but given the lack of uniformity across the various taxing jurisdictions, the fact that some states do not even have an income tax (Florida, Washington, Texas, I’m looking at you), and the varying rates in the cities and states, it is certainly possible for a player on one team to pay much more tax than a player on another team. This can be very interesting when analyzing a contract because the gross salary received across multiple offers to a free agent can turn out very differently depending on the teams making the offer, a facet of analysis rarely explored.

A tremendous dialogue opened up after that last article, and I was asked about the possibility of applying the different jurisdictional tax rates to the schedule for the upcoming season in to build the equivalent of park factors for state and city taxation. With the help of subscriber Tony Franco, this challenge was accepted and, as the kiddies say, “pwned.” We began by researching and compiling the tax rates in each state—or province, thank you very much Toronto—in which a major-league team plays. Next, we scoured the web and my various tax guides for the city withholding rates, though there are relatively few major-league cities with some form of local tax in addition to the state-withholding rate.

In fact, 20 of the 30 teams play in cities without a local tax. The cities with local withholding rates are: Baltimore, Detroit, Kansas City, St. Louis, New York (x2), Cincinnati, Cleveland, Philadelphia, and Pittsburgh. Even amongst those nine cities, the rates are wildly divergent, ranging from one percent all the way up to 3.65 percent. Guess which city has that higher tax rate? It should also be known that, in certain cases like Philadelphia, I am using the non-resident local tax rate; for Philly, the non-resident rate is around 3.5 percent, while the rate for residents is closer to 4 percent.

After all of the relevant rates were compiled, the final step involved applying those rates to the actual schedule. Since we were not using salaries as the input, the output was determined by prorating the games played in each city by the total number of games, and multiplying by the combined tax rate of the home state and city. Luckily, as I mentioned before, the difference between using the more common duty days method and the games played method is immaterial since the denominators are both so large. Before getting into the results, however, I need to explain the assumptions I made throughout the course of this study, as they are of particular importance to taking in the results.

The first assumption was that the credits certain home states give for taxes paid to other states will wash out. This is probably not entirely true, given that some states will limit their credits to their specific withholding rate. In other words, if I am a resident of Pennsylvania with a 3.07 percent income tax and I make money in Massachusetts, which has a 5.3 percent tax rate, the credit in my home state will be limited to 3.07 percent of the total tax incurred in Massachusetts. In cases like this, more tax would be paid. Cases like this will occur, for sure, but I have seen enough accounting literature on multi-state returns to feel comfortable with the assumption.

Secondly, for states and cities with marginal tax brackets—as in, the more you make, the more you are taxed—I took the average of the rates that would be applicable given the major-league minimum salary. In Minnesota, for instance, the rates ranged from 5.35 percent to 7.85 percent, so the rate used in this exercise was 6.6 percent, the average of the two. If this exercise was tailored to a specific individual, I would obviously look to use the actual rates, but to get a sense of the overall team effect I decided to go with the averages as opposed to spending countless hours inputting every single player on a team and his salary. Just know that these are the averages being used and not the exact rates specific to certain players and their prorated income earned in those jurisdictions.

Lastly, I assumed that every player is not a resident of the state in which his home team plays. This is very obviously not 100 percent accurate, but again it represented an example in which only marginal accuracy would be gained by spending more time than made sense. This comes into play in situations like what happened to Sammy Sosa back at the beginning of the decade, where he played for the Cubs and was a resident of Illinois. Though Illinois provided credits for taxes paid to other states, its tax code had a stipulation against such credits for athletes who both played and lived in Illinois. Additionally, the state of residency comes into play when taxing non-salary income, like endorsement compensation. Derek Jeter was involved in a court case centered on this topic when New York City tried to claim that he was a resident of the city in an effort to tax his endorsement money, when he indicated his primary city of residence was Tampa, Florida. The latter scenario is not applicable to the tax on salary, which is the point of this piece, and while the former will certainly occur, I genuinely do not think it would have a material effect on the results of this study.

With the disclaimers out of the way, how do the results look? The tables below break the teams up into their respective divisions, with the effective tax rate players can expect to see by playing for those teams in the upcoming season. By effective tax rate I am not saying that the Yankees are at 7.6 percent because the average New York rates add up to 7.6 percent, but rather that, if you prorate the tax rates of the jurisdictions based on the games played there and add up the results, Yankees players can expect to see 7.6 percent of their income, give or take based on the assumptions presented above, go toward state and city taxes.

The main reason that some teams may have an effective rate that looks much different than the rates of the home city and state is the schedule. A team like the Orioles, for instance, has to play the Yankees, Red Sox, and Blue Jays umpteen times, all of whom have high rates in their respective cities. This is different than a team that gets to play the Marlins and Braves 18 times each. Of course, as Tony and I finished our research, the state of Illinois raised its income tax. Damn Illinois always making things difficult! [Ed. Note: You don't know the half of it.]

NL EAST

Effective State/City Rate

Florida Marlins

2.666%

Atlanta Braves

4.688%

Washington Nationals

5.591%

Philadelphia Phillies

5.729%

New York Mets

7.507%

 

NL CENTRAL

Effective State/City Rate

Houston Astros

2.432%

Pittsburgh Pirates

4.521%

St. Louis Cardinals

4.882%

Chicago Cubs

4.919%

Cincinnati Reds

5.358%

Milwaukee Brewers

5.399%

 

NL WEST

Effective State/City Rate

Arizona Diamondbacks

4.669%

Colorado Rockies

4.960%

San Diego Padres

5.564%

San Francisco Giants

5.666%

Los Angeles Dodgers

5.687%

 

AL EAST

Effective State/City Rate

Tampa Bay Rays

2.888%

Boston Red Sox

5.389%

Baltimore Orioles

6.531%

Toronto Blue Jays

6.624%

New York Yankees

7.595%

 

AL CENTRAL

Effective State/City Rate

Kansas City Royals

5.091%

Chicago White Sox

5.160%

Cleveland Indians

5.263%

Detroit Tigers

5.304%

Minnesota Twins

5.738%

 

AL WEST

Effective State/City Rate

Texas Rangers

2.549%

Seattle Mariners

2.571%

Oakland Athletics

5.336%

Los Angeles Angels

5.612%

Does it really come as a surprise that the Yankees players will incur the most tax? The New York state and city taxes are high as it is, but like the Orioles the Yankees have to play against several high-tax teams many, many times. The teams with very low effective rates are those without state income tax in their home state. What makes this particularly interesting is how the Rangers and Mariners are in the same division and play each other so many times during the year; maybe that rivalry should be named the Tax Heaven Rivalry. The AL Central seems to have the least disparity amongst the teams, which is noteworthy given that the Tigers, at 5.304 percent, define the median of the group. Additionally, the Royals represent the average of the group, as their 5.091 percent comes closest. The New York teams occupy the high end of the range, with the Astros at the other end.

The next step in an exercise like this is to program the same spreadsheet to factor in the various brackets in each pertinent state and city, so that an end user can input a player and his salary, as well as his home team, and basically come up with a gross-to-net calculation of take-home pay. This way we could come pretty darn close to definitively comparing offers from teams. Then again, there are always going to be quirks, such as some Yankees players negotiating state and city tax payments into their contracts to avoid having this much withheld, but hey, that is accounting for you.

 The percentages shown above might not seem like all that much, but for a player making $2 million, who is already losing a high percentage of that salary to the federal government, the difference between signing a one-year deal with the Astros and the Mets can amount to over $100,000 of tax liability.

Hopefully, these articles have shed some light on how zany the jock tax can be. Going forward, my hope is that they can serve as a foundation for future studies that attempt to compare offers to free agents by factoring in the tax effect.

Eric Seidman is an author of Baseball Prospectus. 
Click here to see Eric's other articles. You can contact Eric by clicking here

Related Content:  New York Times,  Kansas City

20 comments have been left for this article. (Click to hide comments)

BP Comment Quick Links

bravejason

I like these kinds of articles as I find the business of baseball to be just as interesting as the game itself.

Jan 26, 2011 07:00 AM
rating: 2
 
Nils J

Amen, these are great. You're on to something Mr Seidman

Jan 26, 2011 08:24 AM
rating: -1
 
BP staff member Eric Seidman
BP staff

Thanks, guys. I'm going to tackle disability insurance in the coming weeks, which should be fun as well.

Jan 26, 2011 13:13 PM
 
cdmyers

Thanks Eric, interesting stuff. It might be interesting to look at the rate if you just took the highest marginal rate. After all, surely this is what matters if a marque free agent is deciding between eight figures from Texas and slightly higher eight figures from New York.

Jan 26, 2011 07:02 AM
rating: 4
 
Ehren Bendler

I've always wondered about this. Glad to see someone finally went and found all the info.

Jan 26, 2011 07:40 AM
rating: 0
 
PeterBNYC

Eric: After this labor, any agent who fails to take your work into account will be guilty of malpractice! Hope you get a royalty! Fascinating. Federalism sucks, eh?

Jan 26, 2011 07:55 AM
rating: 0
 
Adam Hobson

Well the agent makes the same regardless of what state is taxing his client ;-)

That said, I think many of the premier athletes go after the largest contract almost more out of pride than greed. They'd rather be the highest paid player at their position, than take in more after tax income than the highest paid player at their position. Of course, athletes are people and motivations vary greatly.

Jan 26, 2011 17:58 PM
rating: 1
 
tonyfranco

Great work Eric, I had fun on this project. I am curious to see what the real difference is if we look at contract offers when factoring the marginal rates.

For instance assuming Crawford had $20MM/yr offers from both the Red Sox and the Angels. At that salary level his marginal tax rate in California jumps from the 6.4% average to an actual 10.43% versus the 5.3% in Boston. (California has 10.55% top tax rate for incomes over $1.0MM).

Just for home games, Crawford's tax bill playing for the Angels would have been $513,000 more per year than for Boston!! This doesn't account for the schedule and the fact that the Angels play an additional 12 games in California (Athletics and Dodgers.

Jan 26, 2011 09:05 AM
rating: 6
 
meanwhoogean

Great article. As someone who lives in New York, I share the Yankees' pain; unfortunately, not their pay checks. I llovd this site because it explores so many elements of baseball.

Jan 26, 2011 10:00 AM
rating: 1
 
rweiler

It's worth pointing out though that the opportunities for lucrative endorsement deals is probably much greater playing for the Yankees or Red Sox than, say, the Rays, so a player choosing to play for the Rays in order to minimize his tax exposure is probably losing money on the deal.

Jan 26, 2011 10:20 AM
rating: 4
 
garethbluejays2

Don't understand what the final income tax take will be for the player wherever he plays, as I'm English and have never lived in the USA. As a comparison, sportsmen in the UK should pay tax at 20% on salary up to £43475, 40% on salary up to £15000 and 50% on anything above £150000. Plus a bit of what we call National Insurance (money that goes into your state pension). I say should, because image rights payable to a company (ie a company owned only by the sportsman) are very popular, as you pay lower company taxes than income tax. Think baseball players would like to swap?

Jan 26, 2011 11:33 AM
rating: 0
 
tonyfranco

Gareth, in the states there are Federal, State, and City income tax rates. The rates vary from state to state, and city to city, and not all states or cities have income taxes. For instance there is no income taxes paid in all of Florida or Texas. However, in New York you have both a state income tax and a City of New York income tax.

The study in this article weighed the various tax rates against each team's schedule to determine what the final tax rate would be for a player on that particular team. (This is irrespective of the amount of salary.) So a player on the Texas Rangers would have an income tax rate of 2.549% whereas if he played on the New York Yankees he would have an income tax rate of 7.595%.

Jan 26, 2011 11:51 AM
rating: 0
 
koopbri

Federal taxes are ignored in this analysis, correct? That's fair enough here, because the main purpose of the article is to compare US states and cities.
But I doubt that the Toronto figure means much if it ignores Canada-US federal tax differences.
Also one can't make international comparisons without considering federal taxes.

Jan 26, 2011 12:54 PM
rating: 2
 
BP staff member Eric Seidman
BP staff

Yes, federal taxes are ignored, as every player would be in the highest tax bracket. Good point with the Canada-US fed differences, though. Something to look into for sure.

Jan 26, 2011 12:58 PM
 
edanddom

This was great. I missed the original article, too, so I'm glad I caught this one.

Another fun ("fun") angle for you guys to explore may be the net impact of the city/state tax on total payroll. That is, for a given team for a given year, how much does the team theoretically save vs. an average team due to their location having a more attractive relative tax? You'd have to first make the aggressive assumption that (free agent) players know everything that you just outlined in this article, but assuming the city/state is effectively "paying" each player the money that the team didn't have to because its offer was deemed equivalent to that of other teams, what is the total net impact on payroll in dollars? Does Houston stretch it's payroll by a million bucks because of this? Again, more of a curiousity than anything.

-Ed

p.s. Doesn't this make a high school kid even a tad bit more annoyed at being drafted into servitude by the Orioles?

Jan 26, 2011 13:06 PM
rating: 0
 
cdmyers

Also interesting how stadium locations might affect this. Do Jets and Giants players save money because their games are played in New Jersey, which while a high tax state isn't as high as the combined city/state rate of NYC?

Suppose the Nats had followed through on their threat and moved to Northern VA while keeping the franchise name. Seems like that could have had a huge tax impact (though it makes you think that Redskins players wish their team had moved to, say, Fairfax, VA instead of Landover, MD).

Jan 26, 2011 13:20 PM
rating: 2
 
ScottyB

I live in NYS and do a reverse commute out to NJ. The state taxes pretty much cancel each other out on April 15th. As Eric wrote, most states give you credit for state taxes paid to other states. NYC has its own city tax, but not being a NYC resident, I don't know the exact ramifications.

Jan 26, 2011 21:24 PM
rating: 0
 
chiefwj

I think for tax purposes, the team has moved to Virginia, where their offices and practice facilities are. A Washington football player would set foot in the state of Maryland for business purposes only for eight home games, however may exhibition games are scheduled, and any home playoff games. So, if the calculation is based on games played, they would pay the bulk of their taxes to Maryland but if based on number of days in the jurisdiction, the bulk of state taxes would be paid to Virginia.

Feb 06, 2011 10:07 AM
rating: 0
 
chiefwj

Eric: Two points about your otherwise well-researched article. First, the District of Columbia is prohibited from taxing nonresidents. This is intended to prohibited a commuter tax, but it has the added effect (unless there's an additional piece of information that I don't know) of prohibiting both a tax on Nats players who live outside DC (I believe most of them have apartments in Arlington VA, not in the District) as well as visiting players. This has the additional impact of lowering the effective rate for NL East players. Second, to the extent that anyone lives in the District, it's misleading to say that DC has a local income tax when it imposes the equivalent of a state tax. Also, I wonder whether visiting teams that get a percentage of the gate are subject to DC's gross receipts tax, although this wouldn't affect the players.

Feb 06, 2011 10:03 AM
rating: 0
 
adamsternum

This is brilliant. And taking the further steps described at the end of the article would be much appreciated.

Feb 19, 2011 11:19 AM
rating: 0
 
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