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Does the Jock Tax Impact Athletes’ Decisions?

Free agency periods in professional sports often elicit discussions about the jock tax. The jock tax is imposed by state and local governments on income earned by athletes when they perform in cities with such taxes.

States and cities have different tax rates. The more games played in a higher tax jurisdiction should result in more total tax paid. I covered the topic after Albert Pujols decided to sign with the Los Angeles Angels of Anaheim this past offseason.

So, do state and local tax rates impact the decisions of free agents?

California State Assemblyman Martin Garrick believes so. In a piece for the San Diego Union-Tribune, he claims the State’s jock tax creates a disincentive for professional athletes who consider whether to join a California team. He then states that the state legislature should take action to reduce or eliminate the disincentive.

I believe his analysis comes up short. There are a few key points Mr. Garrick does not mention.

via Wikipedia

First, he uses the example of baseball slugger Carlos Lee vetoing a trade to the Los Angeles Dodgers. He simply assumes a higher tax burden was the reason of the veto.

How come Albert Pujols decided to sign with the Angels when he could have re-signed with the Cardinals? Pujols is paying more taxes as a result of the decision.

Second, Garrick does not describe the difference in the effective tax rates by playing for different teams. Merely saying that one state’s income tax rate exceeds another’s is an oversimplification.

Sure, Garrick is correct to say that in general professional athletes on Californian teams pay more taxes than athletes on teams in most other states. Asserting that the increased tax burden is the primary reason players turn down the opportunity without offering a quantiative analysis, however, seems unconvincing.

Furthermore, it is at least arguable that moving to a team in a larger market provides athletes more oportunities for endorsement deals, possibly offsetting to an extent the increased tax burden.

Taxes may play a role in athletes’ decisions. It just appears some politicians may be exaggerating the significance of that role.

  1. Matthew Rappaport
    July 17th, 2012 at 10:19 | #1

    Tax rates absolutely affect athletes’ free-agent decisions. The best examples come in sports where there is a cap on “max” contract offers (i.e. basketball and hockey). If a free agent is offered “the max” by an L.A. team and by a Dallas team, the Dallas team’s offer is effectively higher considering the absence of many state taxes that California levies. In fact, the Dallas offer turns out to be significantly higher– greater than 10%, depending on how you look at it. That’s more than $10 million.

  2. taxdood
    July 17th, 2012 at 10:39 | #2

    @Matthew Rappaport

    Let’s say you’re right that there’s a $10 million difference in tax paid. My point is by signing with a CA team, that player could earn $10 million more in endorsements over the course of the contract than if he signed with a TX team.

    I’d need to examine endorsement opportunities based on geography to see whether my point has some substance.

  3. July 22nd, 2012 at 08:56 | #3

    Resident and non-resident state taxes affect athletes and the amount of net income they receive. For example the Angles needed to compensate Albert Pujols $23.638 million more than the Miami Marlins in order to compensate him for the amount of state income tax he was exposed to over the length of his contract. In order to see a more in depth analysis on Albert Pujols contract analysis and how state income taxes affect professional athletes please feel free to check out the following article: http://afpconsultingllc.com/news/the-cost-of-state-income-taxes-2/

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