The Jock Tax

Last season, Cliff Lee had seemingly narrowed his suitors down to the Rangers, Yankees and an unidentified team. About that time, some analysts began to approach his free agency differently.

Instead of analyzing average annual values — or where the deal ranked historically — folks began to calculate which of the two offers would give Lee the most profit, given the tax rates in New York and the lack of one in Texas. While the federal tax code is uniform, the rates across states and cities are wildly divergent. With that in mind, it stood to reason that Lee could conceivably take home more net compensation in a deal that, on the surface, appeared lesser in value than other offers.

Stories that marry together my careers — accountant and baseball analyst — are always intriguing. But I’ve noticed errors in these analyses. Primarily, the new-wave tax articles were ignoring the fact that Lee gets taxed in every city and in every state in which he plays.

This concept is nicknamed “the jock tax,” where states and cities tax non-resident athletes who earn income in their territories. This tax applies to everyone working in multiple states — but because athletes’ salaries are widely known, and team schedules are common knowledge, it’s easy for taxing authorities to apply the tax to athletes.

For more of a history lesson on “the jock tax,” peruse my first article on the subject. But instead of digging deep into the history, we’ll summarize its importance, explain how it impacts this free-agent class and discuss a nifty tool I created that analyzes these transactions.

The first key is that an athlete is liable for taxes in two primary states: his actual state of residency and the home state of his employer. A Phillies player whose residence is in Alabama owes tax to both states. Some states offer credits for taxes paid elsewhere to avoid double taxation, but there are convoluted rules in certain states where double taxation occurs.

In 1999, Sammy Sosa played for the Cubs and was considered a resident of Illinois. The Illinois Income Tax Act provided credits for taxes paid to other states for their residents, but not for residents of Illinois who played for teams within the state. Because Sosa played for the Cubs and made his residency in Illinois, he was taxed twice — whereas an Illinois resident playing for the Pirates would be taxed just once. Sosa filed to have parts of the act rendered unconstitutional but he ultimately lost the case.

Taxes are calculated using the “duty days” method. There are 220 duty days in a baseball season, and a duty day is really considered to be any day during the season where professional activities are undertaken. This includes traveling or off-days in a regular season. If Chase Utley travels to San Francisco on Monday to play a three-game set from Tuesday to Thursday, he’s liable for tax in San Francisco from Monday through Thursday.

And given even more convoluted rules, it’s possible he owes tax to Pennsylvania on Monday as well, since some states consider a travel day that began in their jurisdictions to be a taxable event. But duty days are used as the prorating tool for calculating tax liability in different jurisdictions.

If Player X makes $10 million and spends four duty days in Pittsburgh — 3.07% state rate for Pennsylvania, plus a 1% rate for Pittsburgh — he’s liable for $7,400 in taxes for that trip. The $10 million is prorated to around $182,000 for the four duty days, and tax is incurred on that prorated salary. From this little exercise, it’s clear that taxes for athletes add up.

But most cities don’t have local individual income taxes. Some states don’t have an income tax, either. Florida, Texas and Washington don’t levy statewide personal income taxes, which is why many athletes either flock to those destinations, or they try to establish residency there. Derek Jeter is clearly Mr. New York, but he was sued by New York City at the beginning of the millennium since he claimed he was a Floridian. If New York were his resident state, his salary and endorsement money would be hit much, much, much harder.

Because of the varying tax rates and unbalanced schedule where teams play divisional foes much more often, it’s possible for deals to net a player more while appearing less lucrative. To that end, I devised a spreadsheet with a friend, Tony Franco, that calculates the effective state/city tax rate for each team. The spreadsheet is based on the rates in their jurisdictions and the actual major league schedule.

Some teams have benefits: the Rangers and Mariners (remember that Texas and Washington have no state or local income taxes), play at least 90 of their 162 games against each other or at home. The Astros play 81 games without tax, and another 25 against divisional rivals with lower rates (Pirates, Cardinals, Cubs).

The Astros have the lowest effective state/city tax rates for 2012, with the Rangers and Mariners close behind. The team playing in a state that does have a personal income tax — with the lowest effective rate — is the Arizona Diamondbacks. Still, there’s a pretty big gap between the Astros, Mariners, Rangers, Marlins, Rays and then the Diamondbacks. Those first five teams range from 2.55% to 2.97%, whereas the Diamondbacks are at 4.54%. The Mets and Yankees are at the bottom of the list at 7.45% and 7.74%, respectively. The Phillies, Orioles and Blue Jays round out the bottom five: Ontario has a rather high provincial rate, and both Philadelphia and Baltimore have high local tax rates.

Keep in mind these figures are based on actual applicable rates and the actual major league schedule. However, it does assume duty days are taxable only to the destination, and it uses averages for cities and states with progressive rates (the more you make, the higher the tax). When discussing specific transactions, we’ll of course tailor it to the needs of the player in question. Fielder’s salary might require the high-end of a progressive tax rate for a specific city or state, while Willie Bloomquist’s would use the lower end.

When discussing the signings of Albert Pujols, Prince Fielder and whoever else inks a lucrative deal, the effective tax analysis can normalize the differences between offers accepted and offers declined. Incorporating tax analysis can help make sense of why certain players go for one deal over another, or why they seem to “leave money on the table” — when they’re actually putting more in the bank.




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Eric is an accountant and statistical analyst from Philadelphia. He also covers the Phillies at Phillies Nation and can be found here on Twitter.


52 Responses to “The Jock Tax”

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  1. chuckb says:

    Really informative, Eric. Thanks. So this means that the value of a contract in a season could depend on whether or not an AL team is facing the NL Central in interleague play or the NL East? From a financial perspective, the player would, ceteris paribus, prefer to play for a team who faced the Astros, Cubs, Cards, and Brewers than he would for a team facing the Phillies, Mets, Nats, and Braves?

    I wonder what the difference is in take home pay between 2 similar contracts for 2 different teams. Is there a sizable difference sometimes or do the 2 contracts usually end up yielding similar take-home pay?

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    • j-Martin says:

      I like where this is going. At first I thought I would love to see a table listing the take-home of a $1m salary for each city, but chuckB makes it more interesting by adding the schedule in there.

      As a player considering contracts you can only plan one season in advance and the marginal difference of the inter-league schedule most likely won’t sway one to a losing team vs. a contender, but it’s worth a look.

      As a Toronto fan and Ontario resident I’ve always been curious about what the tax difference is to play here.

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      • Eric Seidman says:

        Did you miss this in the post, or am I misunderstanding what you’re saying? The schedule is clearly incorporated. I mentioned that like 2-3 times. That’s one of the major factors.

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      • Kevin S. says:

        I think what they’re saying is this will vary from year-to-year depending on the interleague schedule a team plays.

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      • Eric Seidman says:

        Right — the interleague can’t be predicted really, however the more material consideration is the rates of the city/state for the team, and those in its division, plus the rest of the league.

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      • JSprech says:

        I’m also very curious how players in Toronto get paid. My assumption is that the Jays organization makes its money in Canadian dollars… are the players paid in Canadian $? If so (and they are U.S. residents) the players would have to pay someone to exchange the millions of dollars they make into US $. The exchange commission has to come into the equation when you’re talking about Toronto…

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      • Gort says:

        @JSprech

        No, all Canadian professional sports teams pay in American Dollars. Revenue sharing calculations (and anything similar in other leagues) are all done in American Dollars too

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    • Eric Seidman says:

      Correct! It might not be massive, but it’s possible. It also means that certain divisions are more desirable with an unbalanced schedule. There is no state tax in Texas, and 9 more of the Rangers games come on the road against the no-tax Seattle Mariners. Compare that to playing for, say, the Red Sox, where there is a mid-high tax and then you play many games in New York, Baltimore and Toronto.

      There are noticeable/sizable differences. On a 1 year, $7 million contract, for instance, the difference between the Astros and Yankees for 2012 is going to be approximately $363,000 (Astros at 2.55% effective rate given schedule, Yanks at 7.74%).

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  2. Connor says:

    Thought behind this is there but I have a few questions. Many teams will stay in a certain location as little as possible to avoid the tax. The Rangers would stay in Texas as long as possible before they fly to Toronto for example, where as the Jays would be leaving early to head to Texas. Over the course of a season, these days can add up and really change the values. Not sure if you accounted for this in your spreadsheet.

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  3. Semi Pro says:

    Using “duty days” seems very problematic. Essentially, off days are treated as work days. How can states even prove that a player traveled early to certain cities? Players shouldn’t be liable for owing tax for days that they don’t work.

    Could you imagine taking a day off and traveling to another state, only to be forced to pay income taxes in that state for 1/250th of your salary? I know it not a perfect comparison, but it helps get the point across.

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    • Eric Seidman says:

      Yeah, it used to the Games Played Method, where it was literally just what % of 162 games were played in the states, but taxing authorities have since moved to duty days, and the GP method is becoming obsolete.

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    • The Difference says:

      Well these players are travelling for business, not pleasure. “Normal” people get paid for travel days for work, and consequently can be taxed too. The marginal gain for an immense amount of work probably prevents cities/states from bothering to tax the average travelling business man/woman.

      To further the point, the cities could argue that the players talked strategy, worked out, watched film, etc. on their travel days, all of which can be considered work activities by the BS machine that is tax law.

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  4. Barkey Walker says:

    For NYC there is the added wrinkle that the substantial city tax only has to be paid if you are a resident of the city itself.

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    • Eric Seidman says:

      Yep — for Philly the local tax is different depending on residency as well. It’s why for specific players, any assumptions used in my work for the league as a whole need to be adjusted to the specifications of players.

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      • Barkey Walker says:

        BTW, thank you so much for explaining this. I’ve know that it is not as simple as others portray it, so I really like to see an article form someone who really knows laying it all out.

        Many of my consultant friends also have to fill out taxes in (almost) every state they work in. The US is also unique in taxing world wide income while other countries (Canada included?) only tax domestic income.

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      • Ian says:

        Barkley – the US is unique in that it taxes all of its citizens/green card holders on their world-wide income, regardless of residence. Nearly every other country in the world taxes solely based on residency. Residency is not always entirely clear, but typically the tie-breakers include things like where the kids/wife live, where the house(s) is/are, where are bank accounts and drivers licenses maintained, etc…one of the tests also incorporates days in each country, kind of like the days in each city/state mentioned above. End result: I’d assume that the majority of Jays ballplayers would attempt to establish their residency outside of Canada, which would be difficult on family life during the season, but much easier on their tax bill. If their family lives in Toronto with them, then they are taxed as a Canadian/Ontario resident on their world-wide income, and are given credit for taxes paid to US states/cities on their Canadian tax return.

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  5. test says:

    How do the states that don’t charge income tax claw back the money that they aren’t collecting? I know I’ve read that a zero income rate can actually be offset by a whole lot of little add-on taxes in some states, although the details and link escape me.

    I suspect that the wealthy baseball players come out well ahead on this tradeoff, any thoughts? I’m thinking increased local sales taxes (which you technically have to pay on a lot of things even if you buy them in other jurisdictions, although I suspect this is commonly avoided/overlooked), property taxes, lots of “fees” on housing, licenses, cars, etc.

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    • Barkey Walker says:

      Taxing groceries is the big one–and this is basically a tax on poor people who spend a huge fraction of their income on groceries.

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    • joser says:

      Sales tax — here in Washington the general sales tax rate is 6.5%, though “unprepared food items” (ie groceries) are exempt. But there are extra taxes on tobacco and alcohol (WA has some of the highest liquor taxes in the country), and state and local taxes on gas (western WA has some of the highest gas prices). And there are local sales taxes on top of the state sales tax, which vary on a per-county basis, and also by what city you’re in inside a county. And in some cases even within a city: in Seattle, for example, there’s a stadium taxing district immediately around Safeco Field.

      The combined state and local taxes in Seattle mean that the basic sales tax is 10%, and even groceries are taxed at around 4%.

      (That said, beer is still significantly cheaper than it is in BC or Ontario, but more expensive than Oregon which has state income tax but no sales tax. ).

      Then there are B&O taxes on businesses, which of course get passed on to their customers, which makes purchases more expensive (driving up the the amount of sales tax paid). And additional taxes that add up: hotel stays in Seattle get an extra 15% tax added on (again, thank Safeco Field for that) and parking garages are required to add a 22% tax.

      There are licensing and use taxes on just about anything you do involving state and local government. (Car tabs used to be extremely high, because the fee was based on the “value” of the vehicle and the govt used their own depreciation schedule that claimed your ten-year old car was still worth most of what you paid for it. However, a citizen initiative did away with this, so tabs are back under $100)

      And then there’s property taxes. And a nearly 2% tax on the sale of existing homes. And so on.

      So that’s how “a zero income rate can actually be offset by a whole lot of little add-on taxes.” At least, in theory. When the economy tanks and people stop spending, you discover it doesn’t offset like it used to and you end up with a big hole in your budget (currently around $2B and counting).

      But the situation is unlikely to change in Washington, since an income tax would require an amendment to the state constitution.

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  6. Nathan says:

    What about the fact that state and local taxes are deductible for purposes of paying federal income taxes? Does this cancel out the effect?

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    • Matt Bertelli says:

      It won’t cancel the effect but it might mitigate it somewhat. You can deduct state taxes from your federal tax liability so it reduces what you would pay the federal government but doesn’t cancel out what you paid to each state.

      Eric can you post a link to the spreadsheet you created? Also what firm do you work for? I am an accounting major and I graduated and am getting my masters currently.

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    • BenS says:

      It could mitigate it to some point but not eliminate it. If a city/state tax rate is x, and the federal tax rate is y, then city/state tax is salary*x and federal taxes are (salary-salary*x)*y. The salary*x subtracted in the federal tax is the state/city tax deduction. So total taxes are salary*x + (salary-salary*x)*y, or simplified salary*x+salary*y-salary*x*y.

      With no local tax, your taxes are simply salary*y.

      So the difference between the two is salary*x-salary*x*y.
      Since y is a percentage tax rate, and thus always less than 1, salary*x is always bigger than salary*x*y, so the deduction helps you but doesn’t completely counteract the local tax.

      The only possible exception would be if the deduction of local tax knocked you into the next lower federal tax bracket, in which case you could end up with a net benefit because of the lower federal taxes. This would be pretty unlikely though, especially with the high salaries being discussed.

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      • Barkey Walker says:

        The tax bracket only affects the tax rate for th last dollar of income. The lower bits are taxed at the tax rate for the lower bracket. There is always a table that makes this clear a page or two from the end of the instructions for the 1040.

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    • Lex Logan says:

      The Federal deduction may offset part of the difference, but the rules are Byzantine. At any rate, assume a 35% Federal Tax rate, that could offset 35% of the difference in state and local taxes, assuming the athlete does not run afoul of the Alternative MInimum Tax. Also, if a player is subject to both sales and income taxes, he can only deduct one or the other. And, of course, the more complex the total tax package is, the more he’ll have to pay his accountants.

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  7. tcnjsteve says:

    Thanks for this article. As a legal-historian-in-training tax policy stuff is always interesting

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  8. jwb says:

    I just ran a back-of-the envelope comparison for Texas’ Michael Young and A.J. Burnett, a similarly compensated Yankee. I used the obsolete GP method because I don’t have access to travel schedules. I assumed that Burnett does not live in New York City (or Yonkers, which also has an income tax) and is not subject to NYC income tax. Young’s effective state and local tax rate was 3.02% and Burnett’s was 7.53%, or about a $750,000 difference. This more than offset Burnett’s $500,000 higher salary. Interesting.

    To partially answer j-Martin’s question, Ontario’s provincial tax of 11.16% is higher than the highest relevant U.S. state tax, California at 9.3%. If a player does live in New York City, his combined city/state tax burden would be 12.62%. I haven’t the bleariest idea how U.S. and Canadian federal taxes compare.

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    • Ian says:

      Nice job on the comparative.

      Combined Federal & Provincial rate in Ontario is 46.4% on all income over about $120K (graduated rates until then). Our Canadian Pension Plan and Employment insurance combines to $4K-ish/year in additional tax…cheaper than the US, but not nearly offsetting the individual tax delta.

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      • AA says:

        Of course, Canada has a huge offset against the US’ beloved form of private taxation – health insurance.

        I don’t think this matters for pro athletes, as I believe they don’t pay for any of their health insurance costs.

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  9. Josh says:

    I wonder if a player could work a clause into his contract wherein he gets paid a higher per game amount at home, in order to avoid this.

    Also, how would Roger Clemens’ Astros contracts come into play in this? If he wasn’t pitching, he wouldn’t travel with the team.

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    • DavidYoungTBLA says:

      I would *guess* that the CBA dictates how salaries are paid out over the season and that it would not allow that.

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  10. Corey says:

    Eric, how do state reciprocal tax agreements work with this? For example, if you live in Maryland but work in Pennsylvania, you pay Maryland income taxes and not Pennsylvania. There are many more agreements like this (and the federal government even makes DC have a unilateral one-way agreement with every state).

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    • Barkey Walker says:

      Yeah, in every way possible DC gets the shaft. Not only does DC have no representation nationally, but the rest of the country’s national representative’s can (and do) set the *local* budget. Meaning that local tax revenue collected from DC’s own citizens is spent according to the spending priorities of people DC folks didn’t vote for. Obviously, federal taxes are the same.

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  11. kds says:

    Eric, well done. And lots of good comments. I just want to point out that in almost all cases the employer, (obviously the team), will withhold tax to all the relevant jurisdictions, and report this on the W-2. Whoever does the payroll will decide the Duty Days, or other appropriate measure of income in the different jurisdictions.
    In general, a resident of one state will pay tax based on 100% of his income, no matter where earned. On income earned in another state, and taxed by them, he will get a credit on his resident state return that is less than or equal to the tax paid the other state. States do not give credits for taxes paid to cities.
    Could you provide a link to the Sammy Sosa Illinois tax case?

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    • Eric Seidman says:

      Another thing worth noting — when interleague play started in 1997, everything was haywire. Internal accounting departments had nightmares withholding from jurisdictions they previously never had to deal with before. I recall one funny situation I heard from a former professor who was the Controller for a team that a certain player had something like 40,000 accidentally overwithheld when it should have been 4,000.

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  12. kds says:

    Corey, The reciprocal agreements apply to commuters who live in one state and work in another on a daily basis. A player for the Phillies who lived in MD conceivably might qualify as a commuter to PA and avoid PA taxes under the reciprocal rules. But he might not have enough days worked in PA to qualify. A Nats player who lived in MD would certainly be taxed by PA as a non-resident for games played in Philly.
    Yes, DC does not tax non-resident wage income. And if they reside in MD or VA they would be taxed there. If a Nats player claimed FL residency and kept a home in VA during the season he wouldn’t be taxed by DC, but I would have to do more research before I would say whether or not he would be subject to VA tax.

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  13. YankeesFan says:

    Overall its a good analysis, there are just a couple issues I think are are worth noting:

    Duty days are only used to apportion a player’s salary, endorsements are taxed in a completely different manner. A player has a lot more control over where his endorsement income is taxed (depending on the wording of the contract) and is able to leverage this to offset the effect of playing in a state with a high income tax.

    Duty days accumulate during spring training, so for players on teams who have spring training in Florida, almost 20% of there income is apportioned to a state with no income tax.

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  14. Antonio Bananas says:

    So, if I want my taxes done this year for free….I can email you? I live in Missouri.

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  15. Taxes=Excitement says:

    To echo what everyone already said, this article kicked ass.

    On the topic of how no-tax states like mine in TX draw revenue to operate a state government, the answer is very simple: we don’t. We’re a state in name only. Perry is a figurehead.

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  16. nice job …..i like your informations….

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  17. Great article.

    I know absolutely nothing of finance or tax law, so I thought this was fantastic and incredibly enlightening.

    Is there any way the home rates could be graphed for each team/state? It’d be interesting to see where everyone lines up on this and if it bears any weight whatsoever on their respective budgets.

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  18. Congressional Tax says:

    My son saw this and passed it on to me. Saw a lot of references to Rick Perry. As an individual who has prepared taxes for althletes and members of congress, I have always thought it interesting that members of congress do not have the same requirements applied to them. When they are in session and working in DC, the District gets zero in taxes. Maybe that is why the tax rates for the District are so high. Congressional employees including a lot of staffers also pay no DC taxes but definietly utilize the services. All the federal buildings and not profit organizations are exempt from real estate taxes as well. I do not have a horse in this race but am just throwing this in as a comment about the tax system. With all the dollar amounts being thrown around, it is know wonder why tax accountants and lawyers get paid so much money to try and figure out the lopopholes. Maybe the Debt Reduction Committee should look into this.

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  19. Laura says:

    Very great article! I’m studying tax and i want to know if is it possible to find somewhere each jock tax rates by states ?

    Thank you!

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