In the world of Major League Baseball (MLB), the geographical location of a player can significantly affect their earnings, not just in terms of salary but in how much of that salary they get to keep after taxes. This post will delve into the tax implications for baseball players, particularly focusing on how contracts in California and New York compare with those in other states, spotlighting the recent record-breaking deal of Juan Soto with the New York Mets.
The Tax Landscape for MLB Players
Professional athletes, including baseball players, are subject to what’s colloquially known as the “jock tax.” This tax mandates that athletes pay income tax in every state where they perform, based on the proportion of their income earned in that state. Here’s how it impacts players:
- States Without Income Tax: Players on teams in states like Florida, Texas, and Washington benefit from no state income tax on their earnings, which can lead to significant savings over the life of a contract.
- High-Tax States: California and New York, with their high state income tax rates, impose a considerable tax burden on athletes. California has one of the highest rates at 13.3% for top earners, while New York’s rate is around 10.9% for incomes over $25 million.
Why Higher Salaries in California and New York?
Despite the high tax rates:
- Market Size: Both states host some of the largest media markets in the U.S., which translates into higher revenue from ticket sales, merchandise, and media rights deals. This financial power enables teams to offer higher salaries.
- Fan Base: The large and passionate fan bases in these states drive attendance and engagement, further increasing team revenue.
- Team Ownership: Owners in these states often have the financial capacity and willingness to outbid others for top talent, knowing that the investment can pay off with championships and fan loyalty.
- Cost of Living: Adjustments in salaries might also reflect the higher living costs in these states.
Juan Soto’s Case – A Tax and Contract Analysis
Juan Soto’s recent contract with the New York Mets sets a new benchmark at $765 million over 15 years, the largest in MLB history:
- No Deferred Money: Unlike Shohei Ohtani’s deal with the Dodgers, which deferred a significant portion of his salary, Soto’s contract has no deferrals, meaning he’ll face the full brunt of New York’s taxes upfront but will receive the entire sum during his playing years.
- Residency Implications: By residing in Florida, Soto benefits from no state income tax on his signing bonus, saving him millions that he would have paid living in New York.
- Tax Loophole: Soto’s contract exploits a loophole where non-residents of New York playing for teams there pay taxes only on the income earned in the state, not on their entire earnings, which could save him about $8 million compared to if he were a New York resident.
Contrasting Contracts Across States
- Lance Lynn’s Move to Texas: When Lance Lynn signed with the Texas Rangers, he benefited from the state’s lack of income tax, enhancing the financial appeal of his contract despite a similar base salary elsewhere.
- Giancarlo Stanton’s Trade: Moving from Florida to New York meant a significant tax increase for Stanton, with estimates suggesting an additional $1.1 million in taxes per year due to New York’s rates.
- Evan Longoria’s Transition: Longoria’s move from Florida to California for the San Francisco Giants similarly increased his tax burden, illustrating how a change in team can impact a player’s take-home pay.
The interplay between where an MLB player signs, the structure of their contract, and state tax laws is complex. Players in California and New York might command higher salaries due to market size and team revenue, but they also face higher taxes. However, strategic contract structuring, like in Juan Soto’s case, can mitigate some of these costs. For teams and players, understanding and navigating these tax implications is crucial in the negotiation and signing of contracts, making the financial aspect of baseball as much a game of numbers as the sport itself.