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Does the Jock Tax Impact Athletes’ Decisions?

July 15th, 2012 3 comments

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.

Albert Heads West

December 12th, 2011 2 comments

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.

via Wikipedia

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.

via Wikipedia

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.

Jock Tax Strikes Big Blackjack Winner in Atlantic City

July 10th, 2011 No comments

High-stakes blackjack player Don Johnson recently walked away from Atlantic City casinos $15 million richer over a five month period. Before taxes, that is. A resident of Pennsylvania, he’s now well-aware how the Garden State’s jock tax leaves a large chunk of those winnings in the state’s coffers:

[Johnson] said the state’s reaction to his winning spree could put a chill on high-roller betting in New Jersey. He said he’s being told to pay New Jersey income taxes on his winnings even though he has never lived, owned property or done business there.

“That would be a precedent that might just kill off New Jersey gaming,” he said. “I can’t imagine any big player going there knowing that if he does hit them big, he might have a tax liability to them even though he’s paying taxes in his home state.”

He said he was being asked to pay under a provision tied to the introduction of gambling in New Jersey in the 1970s.

“It made sense when you had no other states surrounding New Jersey that had gaming,” he said. “Now you have all these competitors involved. It becomes a nightmare for a player who wins big and plays in multiple states. He has to figure out what his P&L is in every state. It’s ridiculous.”

Johnson explained further.

“Let’s say you won $1 million in New Jersey for the year, but you lost $2 million between Pennsylvania and Vegas. You had an overall net loss of $1 million. You lost money for the year, but the state of New Jersey may still come after you to try to require you to pay for what you won from them. That’s where this doesn’t work. The math doesn’t work on that.”

While the math may not “work,” he’s right about New Jersey imposing tax on the $1 million in his example. It’s a killer particularly because New Jersey has one of the highest income tax rates of all states. What Johnson doesn’t point out, however, is that as a resident of Pennsylvania, he may be able to take a credit on his Pennsylvania tax return for taxes paid on his gambling winnings to New Jersey. The significance is that he’ll pay only the higher of the two state’s tax rates (in addition to the federal rate, of course).

Despite the possibility of the credit, he makes a fair observation about how the state’s jock tax may hurt the New Jersey gaming industry, with casinos across the state border in close proximity. If Johnson won the $15 million in Pennsylvania casinos instead, he’d pay far less in state income tax because Pennsylvania’s personal income tax rates are much lower than New Jersey’s.

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