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The Effect of State Taxes on Baseball Free Agents

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The Effect of State Taxes on Baseball Free Agents (C) Tax Analysts 2013. All rights reserved. does not claim copyright in any public domain or third party content. The Effect of State Taxes On Baseball Free Agents by Gregory G. Geisler and Stephen R. Moehrle after-tax income in those jurisdictions is the allow- Gregory G. Geisler ([email protected]) is an associate able itemized deductions. Florida has no tax on professor of accounting and Stephen R. Moehrle individual income, so allowable deductions are irrel- ([email protected]) is a professor of Accounting at the evant. Of the other states, all of which tax individual University of Missouri-St. Louis. income, only Illinois disallows itemized deductions. California allows itemized deductions but limits them for high-income residents. In contrast, Mis- souri has few limitations on itemized deductions. Albert Pujols and Mark Buehrle were Major Hence, the allowable itemized deductions are vastly League Baseball free agents following the 2011 different across these jurisdictions. baseball season. Ultimately, Pujols signed a 10-year contract with the Los Angeles Angels of Anaheim, ‘Jock Taxes’ on Games Outside the Calif., totaling $240 million (excluding incentive Team’s Home State provisions), and Buehrle signed a four-year contract Professional athletes (and other performers) are with the Miami Marlins of Florida totaling $54 often charged a tax on income earned in the state million. Both contracts are backloaded. Pujols’s sala- where they are performing, euphemistically known ry for the 2012 season was $12 million, and as ‘‘jock taxes.’’ For professional athletes, that means Buehrle’s was $6 million. paying income tax to many states. California pro- The negotiations that culminated in these con- vides its performer-residents a full tax credit for jock tracts present an especially rich setting for examin- taxes paid to other states. Missouri provides a tax ing jurisdictional tax considerations. Pujols’s deci- credit for jock taxes paid to other states, but has a sion came down to the St. Louis Cardinals or the Los limitation, as will be discussed. Illinois does not Angeles Angels of Anaheim. Buehrle’s decision came provide a tax credit to its residents for jock taxes down to the Chicago White Sox or the Miami Mar- paid to other states. Hence, the allowance of a credit lins. Those four jurisdictions feature vastly different for income taxes paid to other states is vastly differ- state and local tax treatments, with financial rami- ent across those jurisdictions. fications in the hundreds of thousands of dollars each year. We demonstrate the tax implications of Missouri and California allow a credit for state the different tax treatments in the context of the income tax paid to other states on income earned contracts of Pujols and Buehrle. while spending ‘‘duty days’’ in a state where away games are played. The tax credit allowed by Mis- Background souri is the lesser of the actual tax paid to that other City earnings tax. The city of St. Louis has a 1 state or what the tax would be if the games were percent earnings tax. Anaheim, Chicago, and Miami played in Missouri instead of the other state. do not have earnings taxes. Considering Pujols as a resident of California, State tax rate. Of these states, Florida has the this credit for jock taxes significantly reduces state lowest state income tax rate for individuals — 0 income tax because every tax dollar paid to other percent. Illinois has a flat 5 percent individual states is allowed as a credit against California income tax rate, and Missouri has a 6 percent top income tax. If Pujols were a Missouri resident, the individual income tax rate. California has by far the credit for jock taxes would reduce his Missouri highest top individual income tax rate — 13.3 per- income tax, but not by as large an amount as for cent. Hence, the state tax rates are vastly different California’s. Many MLB teams play in states with across these jurisdictions. higher tax rates than Missouri’s. Thus, part of the Allowable itemized deductions from the taxable tax paid to those states is not allowed as a credit state income. A major consideration for analyzing against Missouri income tax. State Tax Notes, March 18, 2013 869 Special Report Illinois income tax law is unique in that the Chicago to be second to nontaxing Miami in tax (C) Tax Analysts 2013. All rights reserved. does not claim copyright in any public domain or third party content. income tax pro athletes pay to other states when favorability. However, other tax considerations performing outside Illinois cannot be used to reduce make Chicago an unfavorable market from a taxa- income tax paid to Illinois. Effectively, a pro athlete tion perspective. The analysis in this article demon- on a Chicago team is double-taxed on income earned strates the importance of evaluating income earned from games played in states that have a jock tax in different jurisdictions after considering taxes paid because both Illinois and the state the game is to all the governing jurisdictions instead of focusing played in collect tax on the same income. State only on the differences in tax rates of the governing income tax on a Chicago Cub was analyzed previ- jurisdictions. When all taxing criteria are consid- ously in the context of the 2002 manager of the ered, Chicago will be more expensive than St. Louis, Cubs, Dusty Baker.1 Baker earned a salary of $4 despite St. Louis’s 1 percent city earnings tax and million. His state and city income taxes were esti- Missouri’s higher income tax rate in comparison mated, and the conclusion was that he paid with Illinois’s tax. $102,900 additional tax because he could not take a credit for any jock taxes paid outside Illinois. Relevant Comparison: The Illinois tax law disallowing credit for jock LeBron James’s Free Agency taxes paid to other states, while conceptually un- In late 2006 Stephen Kidder, who serves as tax seemly, has withstood legal challenges by former counsel for several professional sports’ players asso- Chicago Cub players Sammy Sosa and Dave Smith.2 ciations, said, ‘‘State taxes are now a factor that In Sosa’s case, the judge wrote in response to one of players will take into consideration when deciding the plaintiff’s challenges: where they want to play.’’ In 2010, when LeBron Sosa makes a tortured attempt to bring the James was an NBA free agent, two of the teams he failure of Illinois to allow a credit for taxes paid considered signing with were Cleveland (his home- to another state under the Commerce Clause. town team and the only pro team he had ever played The Court fails to see how the Commerce for) and Miami. He chose to sign a contract with the Clause is implicated by a state’s unwillingness Heat of Miami, where there is no city earned income to provide a credit to individuals who are tax and no state tax on income, instead of re-signing residents for taxes paid to another state. with the Cavaliers of Cleveland, where both taxes The judge agreed with ‘‘the longstanding prin- exist. There were major tax advantages for James to ciple of both state and federal law that tax credits sign with his new team in Florida instead of his . are matters which a legislative body is free to former team in Ohio. grant or withhold in its complete discretion. The After James signed with the Miami Heat, many wisdom of the tax policy presented by a credit which articles pointed out that even if his salary was the is parsed to some, but not all, is not for this Court to same with both teams, his after-tax salary with determine; it is a legislative prerogative.’’ Miami ended up much higher than his after-tax salary with Cleveland. Cleveland levies earnings tax Federal Deductibility of State and at a rate of 2 percent, and Ohio levies tax at a rate of Local Taxes nearly 6 percent on an individual’s income (after The effect of high state and local taxes is miti- subtracting deductions Ohio allows). Income is not gated by the deductibility of those taxes on the taxed in Florida. The NBA has the ‘‘Larry Bird federal tax return. We factor that effect into our exception’’ to the NBA’s salary cap rules, which were analysis, as well. designed to give a player’s current team a better Overview chance to keep that player by being able to offer a In summary, there are several tax policy differ- higher salary. The effect is that the maximum before ences across those jurisdictions. Florida has no state taxes that the Cleveland Cavaliers were allowed to tax, California has a high state tax rate, and Mis- pay James was more than any other NBA team — souri and Illinois have tax rates in the middle range approximately $20 million versus $19.2 million per among states. St. Louis has a city earnings tax. year. Although he would have received approxi- Chicago, Anaheim, and Miami have no city earnings mately $800,000 more in annual before-tax salary taxes. Based on those considerations, one expects by remaining a Cleveland Cavalier, his after-tax salary would still be higher playing for the Miami Heat and moving from Ohio to Florida. 1David K. Hoffman, ‘‘State and Local Income Taxation of Pujols, Buehrle, and Free Agency Nonresident Athletes Spreads to Other Professions,’’ Tax Unlike the NBA, MLB has no salary cap. The Foundation Special Report (No. 123) (July 2003). richest teams often outbid their competitors, as was 2See S. Sosa and S. Sosa v.
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