I set out today to try to find another reason for Free Agents to choose Houston over other teams. Since I work in finance I decided to follow the money. I have never claimed and will never claim to be a tax professional (especially after this exercise). I wanted to know if there was enough of a difference in taxes to make a compelling argument as to why Houston should be a destination team.
I decide to compare the tax implications of the avg. MLB salary (3.4mm in 2014) in 2 states. Texas has no state income tax and California has a very high tax rate. I decided on the Houston Astros and the free spending LA Dodgers being my teams of interest. Each team plays a few games out of the country (HOU @ TOR and LAD @ SD in Australia), so I decided to treat those as home games and avoid trying to calculate international taxes.
While I was doing some research I noticed a few things worth noting. 1) There are 4 teams in the AL that play home games in state tax-free states (Sea, TX, HOU & TB), while there is 1 in the NL (Mia.) 2) There are 3 NL teams from CA ,one of the highest state tax rates) vs. 2 in the AL. 3) The NL West is the worst division in MLB for taxes while the AL West plays more games in a preferential tax state than other divisions.
Since I am not a tax professional I can not guarantee 100% accuracy in my calculations but these numbers are going to be very close.
There are so many variables when it comes to taxes; marital status, dependents, charitable donation, capital gains/losses, investment income, etc. To make things a little easier on myself, I decided to remove some variables; for the sake of this exercise I will compare 2 married men with no dependents. These two men also do not make any charitable donations and make exactly the same salary and have no other income. I also rounded and tried to simplify the tax code (which is impossible, what are those fools doing in DC). I also went ahead and gave each player the standard deduction (SD) of $12,400.
One thing that is overlooked or more commonly unknown is states taxes have to be paid based off the income earned within that State. So for example the 2014 Astros play 58 games in 12 different states with income tax, meaning Astros player pay taxes in 12 states. And every state has a different tax rate based on income! While being a CPA for MLB players will generate a lot of billable hours, it also creates a lot of tedious paper shuffling and dealing with state treasuries, I will pass on that profession.
Astros player – $3,400,000 annual salary, married, no kids, lives in TX all year – after SD $3,387,600
LAD player - $3,400,000 annual salary, married, no kids, lives in CA all year – after SD $3,387,600
On a federal level, the highest tax bracket is 39.6% for income over $457,608. Up to that point it is a tiered percentage based off income. I don’t want to bore you with all the mathematical breakdowns but for the first $457,607 earned, the federal government will take $127,962. For the remaining $2,929,992 taxed at 39.6%, Uncle Sam takes an additional $1,160,276 in taxes. The grand total of taxes paid to the Federal government is $1,288,238 or roughly 37.9% blended tax rate. That makes the after fed tax income for the avg. MLB player $2,099,362
Every state has its own tax laws, which makes it even more of an undertaking to calculate. In general, most states will tax the Adjusted Gross Income, which is the gross income number minus deductions. For this exercise, there are no deductions outside the standard deduction of $12,400, so that number is $3,387,600. What this really means is that most states will tax the same money the federal government will tax, not the leftovers from Uncle Sam.
Next we have to break down the AGI (adjusted gross income) based off the number of games played in a non-playoff season (playoff salaries are harder to find, it’s hard to determine how many playoff games will be played and in which states they would be played.) We then come to the paycheck per game (162 / $3,387,600) of $20,911. Not a bad day’s work if you ask me. With 81 home games each player will earn at least $1,693,800 within their states boarders.
Now to the very fun part, determining how many games are played in each state. Again I will not bore you with all the details. I went through the entire 2014 schedule for both the Astros and the Dodgers to determine how many games are played in each state as the "away" team. Some quick things of note, the Astros play a total of 104 games within States where no income tax is applied while the Dodgers get just 3 (again the Marlins). For the Dodgers, in additional to home games, the play another 20 within the state of California.
I could go line by line or include the excel spreadsheet I created to show a breakdown of how much each respective player will pay each state. I could also attach the spreadsheet with all states income tax brackets and break it down to the dollar. But for everyone’s sanity I will just simply state my findings.
For the Astros player: Total taxes paid to all the states where income is earned will be $42,916. Add that to what they will pay the Fed. ($1,288,238) and total taxes paid will be $1,331,154. Leaving him with a net-income of $2,056,446 for the 2014 season and an after tax equivalent of 60.5% of his salary.
For the Dodgers player: Total taxes paid to all the states where income is earned will be $182,173. Add that to what they will pay the Fed. ($1,288,238) and total taxes paid will be $1,470,411. Leaving him with a net-income of $1,917,189 for the 2014 season and an after tax equivalent of 56.3% of his salary.
The total difference between each player’s net-income is $139,257 or 4.2% of salary.
While $139,257 is a big number to us working class folk, it was not as much of a difference as I was expecting to find. It is still not anything the sneeze at though. The number that really stuck out to me however is the 4.2% difference in take home pay. If we look at the mega deal struck by Clayton Kershaw this offseason and subtract the $18m signing bonus (simply because bonuses are taxed differently) that 4.2% would mean a difference of 8,274,000 over the life of that deal.
So for the Avg. big leaguer there really isn’t that much of an added incentive to call Houston home but for the superstar there could absolutely be more gold at the end of the Astros rainbow.