How big a role will income tax play in Cliff Lee’s decision?By
We’ve heard about this one before, and we’ll surely hear plenty about it in the next month-plus. Residents of Texas pay no income tax to the state. The Rangers, therefore, have a competitive advantage. They can offer a player slightly less money than a rival and still have a better overall offer, since the player will not have to deduct those taxes from his paycheck. CNBC’s Darren Rovell breaks down the issue for what certainly won’t be the last time.
Normally this is where I’d blockquote a relevant portion of text and then elaborate, but I’m not sure that’s appropriate here. Rovell gets something wrong early in the article: “So assuming Lee moves residency from Arkansas, which has a top individaul tax rate of seven percent, to somewhere in Texas, he’d save a significant amount of money over living in New York.” The problem with that statement is that baseball players are not taxed based on residency. They are taxed on the location at which they earned their salaries. That doesn’t just include the home state, but all the states they visit throughout the season. It does change the situation a little bit.
Kevin Baxter of the L.A. Times covered the issue last spring in regards to then-Angels pitcher Darren Oliver.
If opening day is the best day of the year for professional athletes, then April 15 — tax day — is probably the worst. Especially now that 20 of the 24 states with franchises in at least one of the four major pro leagues — the NFL, NBA, NHL and Major League Baseball — have laws that require visiting athletes to pay state income tax for each game they play there.
Lee would still pay a lower state income tax as a Texas Ranger, but it’s not to the level Rovells suggests, which is $15.13 million over a five-year span. That changes the result of Rovell’s analysis, which has the Rangers needing to offer $107.2 million against a New York offer of $120 million.
I’m also surprised that Rovell didn’t bring up the endorsement difference. I’m not sure what that difference would be, but I would assume that there are more, and more lucrative, endorsement opportunities in New York. As we saw with Sabathia and Subway, there doesn’t seem to be a waiting period. If a name as big as Lee signs in New York, he’ll probably make endorsement dollars fairly quickly. Endorsements, however, are where residency comes into play. Those are taxed based on your state of residence. But there are a number of states that don’t require residents to pay income tax — including Florida, where Derek Jeter has established residency.
During the negotiations, though, this matter probably won’t matter much. A 2007 study notes that, “Unlike the pre-tax salaries reported in the media, MLB players compare after-tax salaries when considering offers, according to the authors.” In other words, this issue will be out in the open as Lee negotiates with potential suitors. It won’t be something that the Yankees leave out or anything like that.
Given all that we know and have read about this situation, it doesn’t appear as though there is an enormous advantage to living in tax-free Texas. While Lee would pay no state taxes for 81 games, he’d still pay other states’ income taxes for road games. The added endorsement opportunities in New York, then, could cover some, if not all, of the difference. And whatever is not covered will be by the New York checkbook.
I wouldn’t give this issue much more thought going forward.