Reform favors no-income-tax states in hunt for athletes
New York — Teams in Texas, Florida, Nevada and Washington state may have become more attractive destinations for free agents following the enactment of tax law changes.
Deductions for state and local taxes are capped at $10,000 in the year starting Jan. 1 for married couples filing jointly. That has a huge impact for athletes with seven- and eight-figure salaries.
“Obviously, the zero income-tax states have now more of an advantage than before,” said baseball agent Scott Boras, who is negotiating big-money deals this offseason for free agents J.D. Martinez, Eric Hosmer, Mike Moustakas, Jake Arrieta and Greg Holland.
Geography, family comforts, playing time and winning remain the most important factors for many.
“I understand the tax differential issue but have rarely thought it was outcome determinative in where a player signs,” baseball Commissioner Rob Manfred said.
But the teams in states with a higher percentage of take-home pay make their advantage known.
“All teams in tax-free states do,” Dallas Mavericks owner Mark Cuban said.
The $10,000 limit also includes deductions for property and sales taxes — large numbers for the most prominent athletes.
At the same time, the top tax rate has been lowered to 37 percent for single filers earning more than $500,000 and married couples filing jointly earning more than $600,000. That is down from 39.6 percent for single filers earning more than $418,400 and married couples filing jointly earning more than $470,700.
For baseball, the AL West becomes the most attractive for tax status. The World Series champion Houston Astros, along with the Texas Rangers and Seattle Mariners, all have no state income tax. That means a player on one of those teams would play 99 or 100 of 162 games in states with no tax.
Rangers President of Baseball Operations Jon Daniels calls the tax advantage “more of kind of a side benefit than a feature.”
“Some players and some agents care more than others. Some have been more focused on the sticker prices, especially agents that are paid on the gross,” he said. “We try not to make it too much of a focal point of our recruiting efforts. I think when it’s pushed too heavily it can be a turnoff.”
Deals in all four major North American leagues are evaluated for their tax implications.
“The state with no income tax would always win the ties,” said agent Joseph Linta, who negotiated Baltimore quarterback Joe Flacco’s contract.
Money doesn’t always dictate the decision, according to Boras and others.
“Kyle Juszczyk chose the 49ers over no state tax offers because he felt it was the right fit — despite the state tax,” Linta said.
Already complex, negotiations could become even more nuanced.
“Teams based in Florida, Washington and Texas will clearly have an additional advantage over other clubs in contract negotiations with free agent players given the new tax code,” baseball agent Jay Reisinger said. “They already had an advantage by virtue of no state income tax, but this will be magnified under the new tax code. Agents will also seek tax-equalization language in the event of a trade.”
Knowing the Marlins have frequently sold off stars, Dee Gordon, Wei-Yin Chen and Christian Yelich had tax equalization provisions as part of their multiyear contracts with Miami.
California has the highest state tax in 2017, a 13.3 percent rate that includes a 1 percent mental health services tax for income over $1 million.
New York has a top tax rate of 8.82 percent, and New York City has a maximum rate of 3.876 percent for a 12.696 percent total.
An athlete making $10 million a season will get a federal tax savings of about $250,000 with the cut in the top rate. But one who plays half his games in California will lose roughly $650,000 in deductions: half the approximately $1.3 million state tax. That wipes out the entire savings of the federal rate cut.
“The new U.S. tax law, in particular the loss of miscellaneous itemized deductions, will have a significant impact on NHL hockey players,” said hockey agent Allan Walsh.
A player who maintains an offseason residence in Florida or one of the other states with no tax — Alaska, South Dakota and Wyoming are in that group — would benefit by having more of his money paid in a signing bonus rather than salary that is attributable to a specific game. Nationals pitcher Max Scherzer’s $210 million, seven-year contract with Washington includes a $50 million signing bonus that he intended to shield from the District of Columbia’s top tax rate — 8.85 percent this year — by establishing Florida residency.
Under the new law, union dues and agent commissions are no longer deductible. An agency employee said players had called at the behest of their financial advisers asking if they could pre-pay commissions before Dec. 31 on deals to be negotiated later this offseason. The employee spoke to The Associated Press on condition of anonymity because he was not authorized to make public statements.
The Major League Baseball Players Association received nearly $17.6 million in 2016 from daily dues, currently $80 during the season. The NFL Players Association raised just over $33.5 million in dues in the year ending Feb. 28.
The MLBPA may consider moves to lessen the impact of the change in tax treatment for dues.
“It’s unfortunate when looking at ways to cut taxes that things went the other way with respect to those who work under the umbrella of a union or as a union member,” said baseball union head Tony Clark, a former All-Star first baseman.
Owners and management feared a provision in the original version approved by the House of Representatives, which would have prohibited the use of tax-free municipal bonds for stadium financing. That was dropped from the final legislation.
“We were pleased that the bill did not adversely affect the tax issues related to stadium financing,” Manfred said.