Last week, the Los Angeles Angels signed first baseman Albert Pujols to a 10-year, $254 million contract. The contract is the second largest in baseball history, bested only by Alex Rodriguez’s current $275 million deal with the New York Yankees.
Leaving the St. Louis Cardinals and the State of Missouri, Pujols will now play a majority of his games in the State of California. The
Bronze Golden State imposes the highest personal income tax rate for players with annual salaries exceeding $1 million among all states hosting Major League Baseball teams. The rate is 10.3%.
But Pujols’ state income tax burden from his baseball play isn’t calculated by simply taking 10.3% of his annual salary. That’s because he plays baseball in many states throughout the season. Assuming he doesn’t become a resident of California, the 10.3% rate applies only to the number of “duty days” he spends in California. The remainder of his salary is prorated based upon the other states he plays in. This taxation structure is often called the “Jock Tax.”
According to Fangraphs, Pujols’ effective state income tax rate as an Angel is 7.2% for the 2012 season. Interestingly, had Pujols instead signed with the Los Angeles Dodgers, a team just 30 miles from the Angels, he’d be subject to a 7.7% effective rate. The difference is because, in large part, Pujols will play more games in states with no personal income tax—such as Texas (Rangers) and Washington (Mariners)—than if he became a Dodger. If Pujols re-signed with the St. Louis Cardinals, his 2012 effective rate would have been 5.2%.
If Pujols does become a resident of California, however, then his effective rate goes up, because then he must report his worldwide income to California. We’ve seen this type of issue arise before. In 2007, the New York State Department of Taxation and Finance asserted that a certain professional baseball player should have filed as a New York resident for his 2001 through 2003 tax years, and thus be subject to NYS income tax on all of his income. The player: Derek Jeter.
At the time, Derek Jeter owned a home near the Yankees’ spring training complex in Tampa, Fla. The problem for Jeter was that he also owned an apartment in the Trump World Towers in Manhattan. Of course, NYS auditors took the position that Jeter was domiciled in New York. Jeter eventually reached a private, out-of-court settlement for the case.
Although we’ll likely never learn the outcome of Jeter’s settlement, what we do know is that state residency for professional athletes is a topic that isn’t going away anytime soon. An article discussing the Jeter case suggests that LeBron James’ decision to play for the Miami Heat over the New York Knicks may have been in part influenced by Florida’s personal income tax haven.
A part of me thinks some of these athletes make so much money that the bottom line tax implications to them is negligible. But, since we see contract holdouts, arbitration, and other forms of intense negotiations for professional athletes all the time, another part of me believes taxes play a role.