How big a role will income tax play in Cliff Lee’s decision?

Baseball America's Top Ten Yankee Prospects
Open Thread: One Year Ago Today

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.

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Baseball America's Top Ten Yankee Prospects
Open Thread: One Year Ago Today
  • larryf

    How many endorsement dollars would Cliff Lee get/want? He seems like a quiet non-big city guy. Andy is a guy who hasn’t exactly endorsed tons of stuff over the years as a successful pitcher in NY.

    There haven’t been any Jerky or deer hunting endorsements tapped into yet however.

    • Mike HC

      I would think post playing career has to be taken into account to. The Yanks have so much history and such a huge and dedicated fan following that there are immeasurable opportunities for eternity really. Being on the Yanks just gives you World Wide fame.

    • Jorge

      There’s always that Subway commercial where CC keeps on eating his footlong.

    • http://youcantpredictbaseball.wordpress.com/ bexarama

      Andy is a guy who hasn’t exactly endorsed tons of stuff over the years

      Psssht someone forgot the Power For Living commercials

      • Mike HC

        There is no price tag for a personal relationship with God.

        • Poopy Pants

          There certainly is…15% tithing, dignity, lying to yourself, poisoning the minds of your children…

  • Yank the Frank

    The biggest downside of Lee signing with Texas is that he would have to live in Texas.

    • Mike HC

      Although he makes him home in Arkansas and was born there I think. So he may be into the culture down there.

      • Mike HC

        /I’m from NY and everything below me or off my radar is “the south,” ha

      • Brad

        In Arkansas, they belive “Deliverance” is a love story…go figure.

    • Dalelama

      Texas sure beats the hell out of New Jersey.

      • Mike HC

        That is like saying Javy Vasquez beat the hell out of Nick Johnson this year … not saying much of anything at all.

      • http://www.riveraveblues.com Joe Pawlikowski

        So what you’re saying is that you’re projecting your opinions onto Lee.

      • Clay Bellinger

        Well that’s entirely a matter of opinion. I’ve lived in NY and currently live in NJ and have enjoyed both…and wouldn’t even consider moving to Texas whatsoever.

      • http://twitter.com/cephster Ross in Jersey

        You take that back, you jerk.

        • http://www.twitter.com/jordansmed JGS

          Cosign

      • JerseyDutch

        But our chicks are easier.

  • UncleArgyle

    Lee will take the contract that offers him the most years at the most money. Period.

    • Dalelama

      On a post tax basis.

      • UncleArgyle

        No. On a year and $$$ amount basis. Have you ever heard a player or agent say “Yeah team X was offering Y dollars more, but after taxes I actually come out ahead.”? Don’t forget the Agents roll in this. His Commission is greatly reduced if the players opts for the lower face value contract.

        • Mike

          I’m pretty sure you’re entirely wrong. Baseball players aren’t stupid. Would you take a job that pays you less just because your top line pay was higher?

          • Mike HC

            Wanting to know how much money you are going to make after taxes is pretty basic stuff. I doubt even the shadiest of agents would be able to pull the that wool over their clients eyes, but who knows? Athletes have been known to be pretty stupid

          • UncleArgyle

            When baseball players salaries are talked about, have you ever, ever, heard them talked about in terms of “adjusted for taxes”? We’re talking about small percentages on the margins here over a 6 year period. Theres also the loss of Endorsement revenue. Lee’s agent would also earn less, since agents pay taxes in the state they are incorporated in (and Agents do think about this stuff). And lets not forget the pressure of the MLBPA, because again, salaries aren’t calcualted in after taxes terms.

            • UncleArgyle

              Not saying I don’t see your point. But I don’t think Cliff Lee is gonna say “All things being equal, the lower tax rate in Texas just really appealed to me”

            • Hall and Nokes

              Wasn’t it an issue for the Vancouver Grizzlies when they couldn’t hold on to players? Maybe that was more of a Canadian dollar issue, I don’t remember.

        • Ed

          Ever you ever heard a player give a detailed breakdown of his finances?

          Have you ever heard a player give details on offers he turned down?

          Just as you’re not going to post your tax return on the web for us, they’re not going to offer any more details than they feel is beneficial to them.

  • Rey22

    I am actually doing a paper on this very topic for my Income Tax class. Nice timing.

  • Dalelama

    Doesn’t NYC have its own income tax on top of the NY state income tax? I would think a big risk to the Yankee cause is the superior quality of life Texas would provide Lee’s family while he is on the road.

    • http://www.riveraveblues.com Joe Pawlikowski

      The numbers above reflect the NYC tax, since Lee would be playing in NYC.

    • Clay Bellinger

      I don’t see how Texas provides a superior quality of life. Being that he has a family, I doubt that he’d choose to live in the city anyway. He’d probrably get a nice house is Westchester or one of the high-end towns in North NJ like the rest of the players with families seem to do. The quality of life there is just fine.

    • Mike HC

      I’m confused by this comment.

      1) Why would the quality of life for Lee’s family be any different when he is on road rather than at home?

      2) Why would be the quality of life be better in Texas?

      • Dalelama

        I meant that a women from South home alone with kids would prefer living in Texas, i.e. better weather, less crime, less traffic, safer schools, less pollution, less of a rat race, lower cost of living, etc…

        • Mike HC

          got ya.

        • UncleArgyle

          Its called living in the Suburbs. Just because you play for the yankees doesn’t mean you have to live in Manhattan. And after this contract, Mrs Lee won’t be concerned with no “Cost of Living”

        • Clay Bellinger

          Once upon a time CC supposedly didn’t wanna play in NY…a few extra mil, a World Series ring, a parade, 40 wins, and some nice endorsements have changed that view quite a bit.

        • Hughesus Christo

          “Texas, i.e. better weather, less crime, less traffic, safer schools, less pollution, less of a rat race, lower cost of living, etc…”

          Wait… we’re still talking about DALLAS, right?

          Hahahahaha

          • http://www.twitter.com/tomzig Tom Zig

            +1

        • http://youcantpredictbaseball.wordpress.com/ bexarama

          less of a rat race

          If I was Kristen Lee, I would sit at home on my skinny ass all day and eat bonbons.

      • Hall and Nokes

        I don’t think quality of life is an issue for anyone drawing an 8 figure salary. However, I do think that cultural factors are very very relevant here, having lived in New York for almost 2 decades and the South for almost that long.

    • http://www.teamnerdrage.com dr mrs the yankee

      I don’t think Lee is going to do the CC thing and move wherever he signs full time, by all accounts he loves his home in Arkansas.

  • vchem

    As a frequent traveler for my own profession and as someone who lives in NY I must add that NY tax laws are different than most states in that if you are a Resident of NY, then you pay NY taxes for all of your income. What that means is NY will “claw” back from each state the tax paid to that state and the tax payer will make up the difference for those states that tax less than NY. Simply put, if you live in NY, it doesnt matter what state you earn your income, you will still pay NY taxes.

    • Dalelama

      Can’t you avoid that by only living in NY 182 days or less?

      • vchem

        Yes, i suppose you can. My point was more towards the fact that if he lives in NY and is a NY resident, then it doesnt matter where he plays his games, he will still pay NY taxes

  • http://twitter.com/tsjc68 tommiesmithjohncarlos a/k/a Ridiculous Upside the Elder

    Quick and dirty:

    Say Lee gets a 23M salary offer from both Texas and New York. NYC state and local taxes combined are about 10% (most Texas cities also have no income tax). Only half of that 23M per is taxed locally (11.5M).

    10% of 11.5M is 1.15M per year. That’s the basic difference taxwise to him. Over a 5 year deal, it’s not even a 7M difference (more or less).

    • Tom Swift

      That is a good first order analysis. But you have to refine that a bit to take into account the deductibility of state taxes on the federal income tax return.

      • chriskeo

        I really think we are going to far with this, but I think Tommy is just calling all taxes on the federal level a wash (and that the return would be insignificant in the scheme of things). Also, he did say: Quick and dirty.

    • http://www.twitter.com/tomzig Tom Zig

      So just to confirm. If NY offers say 125 over 5, Texas would have to offer 118 over 5 for them to be relatively equal?

      Of course none of this factors in endorsements which he would get a boat load of in NY.

      • larryf

        a bass boat load

    • mike c

      it’s only 10% on a 23MM annual rate? that sounds a little low

      • http://www.teamnerdrage.com dr mrs the yankee

        It’s state and city tax, 6.85% for state over 20k and a bit less than that for NYC residents.

  • TLVP

    The difference is not just the 81 home games. The schedule isn’t balanced and the Rangers play in NY and the Yankees play in Texas. I don’t know who comes out on top but I’m sure the tax consultants know pretty well.

    I think cost of living is a bigger issue – NY costs a lot more than Dallas even if you buy in Highland Park. Still money doesn’t buy everything – when A-Rod moved to Dallas he knocked on the door of my former boss and said he wanted to buy his house. My boss said… No.

    • TLVP

      PS yes i know the Ranger come out on top on the tax rate – what i meant is i don’t know buy how much

  • http://youcantpredictbaseball.wordpress.com/ bexarama

    I wouldn’t give this issue much more thought going forward.

    BUT CLIFF LEE WAS BUYING A COWBOY HAT TEH OTHER DAY AUUGUGUGHHHH

    No, seriously, there is soooo much inanity when it comes to the big FAs. I remember it with Tex and CC to the point where it got absolutely ridiculous. CC wants to hit and he hates cold weather so he’s going to a West Coast NL team! Tex chose the Yankees because his wife hated the shopping in Boston! So dumb.

    • TLVP

      Don’t make fun of wives – they have much more say than most people would believe. Regardless of what most people believe anyone who makes $10m could easily see things I’d do if he made $15m instead. More money matters and it matters a lot – however the difference between $5m extra and an unhappy wife and $5m less and a happy wife -I guess 90% would pick the latter

      • http://youcantpredictbaseball.wordpress.com/ bexarama

        I’m not saying that wives don’t matter. I’m saying that I think 90% of what the wives supposedly think is made up. Though I guess Kristen Lee’s actual quotes about NYers or whatever weren’t.

        • Mike HC

          Wow. Like a ten minute refresh fuck up on my part.

        • Mike HC

          The wives are not in some bubble these days though. They are probably just as in tune with the business side of it, if not more, than the players. I would take what the wives say in public with a grain of salt.

      • Mike HC

        I think she is more making fun of the speculation on how the wives will feel, than the actual wive’s feelings themselves.

    • Thomas Tu

      Tex chose the Yankees because his wife hated the shopping in Boston! So dumb.

      I’m pretty sure that’s not the case. But even if it did factor into the decision, I don’t see how you can overlook this fact.

      I prefer living in cities with mass transit, good food, high diversity population and good shopping options for sneakers.

      That basically means I only want to live in SF or NY.

      You might think it’s dumb, but I think it’s a very big deal.

      • candyforstalin

        good shopping options for sneakers is at the top of my list too.

      • http://riveraveblues.com massapequa parking

        I think the thing on Tex had something to do with comments made by one of the Beantown honchos (Lucchino?) of an anti-Bora nature. Tex’s wife took offense and they left for Boston with a polite we’ll see you tomorrow while Boras spent his night on the phone w/Cash.
        For CC, I think Cash told his wife, who confessed to being a big Thanksgiving Day parade fan, that he could have her and the kids on the grandstand at Macy’s.
        If you don’t think the bride’s opinion matters, perhaps you are single. Speaking of CC, Architectural Digest did a pictorial on his home. I don’t think he has any reason to be concerned about local crime as a factor in the neighborhood.

      • http://riveraveblues.com massapequa parking

        On the sneaker front, CC has a sneaker “closet” that would nicely house my kid’s 30-odd Nikes. We prefer the FCNY (vintage stuff) on Lafayette.

  • Brian getting Greedy Ca$hman

    IS this serious

    http://blog.nj.com/yankees/201.....e_guy.html

    Josh Johnson available ?

    • Mike HC

      1) That article did not say Josh Johnson was available.

      2) There is an open thread at 7pm where we can talk about this here. They like to keep comments on topic.

      • Slugger27

        3) his trade proposal sucks

      • Mike R

        There is no way Josh Johnson is available. It wouldn’t make sense. That being said if he was I’d give up a lot to get him he’s a great pitcher.. However, he just signed a new deal and the Marlins are opening up a new ball park in 2012. There is NO way that they’ll ship away their young stud for some shitty pieces like Chamberlain and Cervelli.

        • YankeesJunkie

          Gardner and Montero sound like a nice start for Johnson. The price is way too high for him even though he is an exceptional pitcher. Hopefully, the Yankees can say the same about Hughes and maybe one of the killer B’s in the future.

  • candyforstalin

    lifestyle and taxes. good thread.

  • Brad

    Big issue not mentioned in article is that Texas cost of living is 40% below NYC. Add that to the tax issue, and the $120M NYC offer only requires perhaps an $80M offer to match. (I know the $80M is not 40% lower, but I on’t know exact break-out of calculation figures, and am not sure if state and city taxes are included, so I just used a rough calculation to demonstrate the concept.) Certainly Lee’s agents will have experienced tax consultants figuring out how the 2 offers compare, including cost of living, taxes, potential endorsements, to which Mrs Lee will be adding her input as well.

    • http://danielslifka.wordpress.com Jerome S

      Yeah but living in NYC beats living in Texas any day, that’s why we pay more.

  • Samuel

    Arkansas and Texas have reciprocity agreements because they are border states.

    While Texas has no state income taxes, Lee would still have to pay his Arkansas state income taxes on income earned in Texas.

    Arkansas’ tax laws says Lee has to pay taxes on all non-exempt income, no matter where that money is earned. If he pays
    income taxes in another state, he can get a credit for them, but
    since Lee wouldn’t have income tax withheld in Texas, he would still have to pay Arkansas income tax on his earnings.

    There are nine states (Alaska, FL, NV, NH, SD, TN, TX, WA, WY) which do not have state income taxes. If Lee earns money in any of these states (such as playing in Seattle or Tampa), then he has to pay income taxes of his resident state only, which is Arkansas.

    But on earned income made in the other 41 states (such as NY), all of his earned income is taxed by his resident state (AR), and income earned in a “taxable” nonresident state is also taxed by the nonresident state. His resident state lets him take a credit for taxes paid to any nonresident states.

    So by Lee working in NY, he is paying double taxes at the time, but then gets a credit on his AR taxes for what he pays in NY.

  • http://www.darrenrovell.com darren rovell

    1. endorsement income is insignificant — lee would make less than $2 million a year in endorsement income compared to salary.

    2. you’re wrong in saying i’m wrong. players are most certainly taxed based on where they live. they only pay jock taxes on the road and those are more of a wash if you are already paying a state income tax.

  • Across the pond

    Can someone explain (I’m not an American), if you don’t pay income tax in these states, how do the states fund themselves?

  • Russell

    In terms of comparing equality in salary between Dallas and NYC there seem to be three basic issues: (i) difference in taxes, (ii) cost of living and (iii) other potential income.

    (i) Difference in taxes: annual cost $1.36 million
    Assumptions:
    ? Top tax brackets: 8.97% NYS, 3.64% NYC Tax, 35% Federal No state or local taxes in Texas
    ? Phase out of Itemized Deductions allow for only 80% deduction of state and local taxes
    ? Assumed that 60% of income is earned in state of employer
    ? I did not consider the difference in away game taxes

    (ii) Cost of Living: we cannot extrapolate Lee’s prospective cost of living increase in New York from Dallas to even a person who earns say $250,000 or $1 million per year. The percentage of earning spent by Lee will be smaller than what it would be for even well paid professionals. In order to estimate the difference, let’s assume the greatest difference (i.e. Lee lives in NYC). Using the elements of several on-line cost of living calculators (www.bestplaces.net), we see the NYC housing is 2.5 times more expensive. Additionally, NYC food is 1.5 times as costly and miscellaneous expenses at 1.2 times as expensive. Assuming that Lee would pay $1 million in rent (what can you rent for $83K a month), incur $200,000 in food and another $1 million in miscellaneous expense, the increased cost of living in NY is roughly $850,000 after tax dollars.

    Result: Even before we get to endorsements the “NYC cost disadvantage” after tax is just over $2.2 million and maybe less.

  • Russell

    Sorry, I forgot to say this assumes a per year salary of $25 million and the cost disadvantage is a per year.

    Also, a quick look at the web sees that SI notes that both Mark Teixeira and CC Sabathia earned $250,000 in endorsements last year while A-Rod and Jeter earned $6.5 million and $8 million. While there is some increased earning potential let’s assume there is no real value to Lee. this is still not an insurmountable difference for the Yankees on Lee.

  • dan

    I would not trade gary sanchez ,he has a chance to be our best catching prospect , I would give montero a chance now to improve his trade value if he’s ready for the majors. Out of the three catching prospects gary sanchez and austin romine are keepers to me.
    Montero I was told failed a drug test which is why yankees signed him so cheap. I think the yankees because he will be a dominant offensive player and an ok catcher yankees will give him a chance for now. But, gary sanchez is projected to be better offensively and defensively. Romine is expected to be good defensively not dominant offensively. I think the yanks are missing the boat if they trade gary sanchez, romine should be ready this year eventually anyway so
    I bring up romine at some point in 2011 if all goes well, and montero would start if posada gets hurt at any point. If all goes well with montero I would trade him at next offseason. By then his trade value should go up!

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