Reese Kaplan -- The Tax Implications on Where a Free Agent Signs

The recent news about Jacob deGrom choosing to close out his baseball career not with his drafting team, the New York Mets, but instead with the Arlington, Texas-based Rangers hit people like a gut punch after having grown accustomed to his mastery on the mound.  After all, you don't win consecutive Cy Young Awards unless you are among the best of the best.  

Despite his many health struggles over the past few seasons, no one can deny the quality of pitcher deGrom has become and what he meant to the Mets organization and fans whenever he took the mound (this past September not withstanding).  

While you can go back and forth numerous times about what the Mets should have done, what deGrom should have done, who will take those starts in his absence, what it means to the prospect of fighting for a 2023 pennant and the like, there is a financial implication that goes far beyond any of these issues.  

What most of us folks don't think much about when it comes to player salaries is that they are like us in terms of having to pay taxes on their income.  Where they choose to reside and where they play their games makes a huge difference in the taxes owed to the states in question.  As such, some of these free agent movements are not simply about the biggest paycheck, but also about how to keep most of the money their team pays them.  

Confused?  Stay with me.  I am not an accountant (and don't play one on TV), but the issues are not all that complicated.  We all are well aware of money we earn that goes to fund the federal government, the state government and the local city government unless we happen to reside or work in places that do not have such withdrawals as part of their revenue stream.  

New York City is a terrific example of an expensive place to live not only based upon the cost of living, but also upon the myriad layer of taxes assessed.  Texas (my former home) did not levy a state income tax.  Think about that for a moment when considering what your paycheck would mean in terms of how much of it you get to keep.  

Seidman compiled a list of financial analysis based upon the team schedules, the local tax withholding, the credits issued and whether or not a player resides in the state in which the income is earned.  

For purposes of this study he made an assumption that player is not a resident in the state where his baseball team plays which may not always be true, but you have to start somewhere.  Have a look (and bear in mind that the Astros and Brewers have shifted leagues since then):

In a study about compensation to professional athletes, the differences in municipalities is enormous.  Eric Seidman of Baseball Prospectus did a series of articles a decade ago about the so-called "Jock Tax" which factors in home vs. away games, state of residence, tax implications to other locations where away games are played, credits back for taxes given elsewhere and the various other factors that enter into how much take-home pay you can actually take home.  The results were pretty startling.

NL EAST                      Effective State/City Rate
Florida Marlins              2.666%
Atlanta Braves               4.688%
Washington Nationals         5.591%
Philadelphia Phillies        5.729%
New York Mets                7.507%
 
NL CENTRAL                   Effective State/City Rate
Houston Astros               2.432%
Pittsburgh Pirates           4.521%
St. Louis Cardinals          4.882%
Chicago Cubs                 4.919%
Cincinnati Reds              5.358%
Milwaukee Brewers            5.399%
 
NL WEST                      Effective State/City Rate
Arizona Diamondbacks         4.669%
Colorado Rockies             4.960%
San Diego Padres             5.564%
San Francisco Giants         5.666%
Los Angeles Dodgers          5.687%
 
AL EAST                      Effective State/City Rate
Tampa Bay Rays               2.888%
Boston Red Sox               5.389%
Baltimore Orioles            6.531%
Toronto Blue Jays            6.624%
New York Yankees             7.595%

AL CENTRAL                   Effective State/City Rate
Kansas City Royals           5.091%
Chicago White Sox            5.160%
Cleveland Indians            5.263%
Detroit Tigers               5.304%
Minnesota Twins              5.738%

AL WEST                      Effective State/City Rate
Texas Rangers                2.549%
Seattle Mariners             2.571%
Oakland Athletics            5.336%

Los Angeles Angels           5.612%

It doesn't take an MBA or a CPA designation to understand that it's a lot more expensive to play baseball in New York than it does in Houston, Arlington, Seattle, Miami or Tampa.  Choosing a location without a state income tax greatly reduces the chunk grabbed by the government from your paycheck.  

In that decade old example it was shown that a $2 million ballplayer in New York would cough up $100K more in taxes than would one in the tax havens that do not raises as much money through income taxes.  

Multiply that over the course of deGrom's new $185 million contract which is over 42 times as big and you see that a tax differential of over $4 million extra dollars going to the government had he gotten the same salary to play in New York.  

While it may be true that choosing where to play baseball often has to do with competitiveness, the pitch made by that team's front office or lingering resentment towards the now former employer, the fact is that tax implications also enter into the equation.  

If you were offered a job in New York or in Seattle for the exact same salary but realized you'd get to keep a lot more of the money out west than you would staying in New York, well, it becomes quite a bit easier to understand why many players pack up and leave.  We might do the very same thing ourselves.  

Think back to the big contracts signed by Jose Reyes, Miguel Cabrera, Alex Rodriguez and others which made you scratch your head and wonder why they would put themselves onto second division teams.  It may be more about the net take-home pay than it is about anything else.  

Good luck to the Mets fulfilling their roster needs given the financial challenge of having players suit up in New York.  Some players really do want to win.  Others want to play for their financial future.