Happy Tax Day, folks. Today is the one day of the year you can be thankful you are not a baseball player. Ballplayers — and all professional athletes, for that matter — have incredibly complicated tax returns because they pay local taxes to the city and state of the opposing team for every road game. Given the nature of their large salaries, these tax payments amount to big bucks. The new tax laws make these payments even larger, because these local taxes are no longer deductible against federal taxes.
I often wonder if free agents factor in tax savings when choosing their new teams, and just how significant the differences between teams are. So I calculated and ranked every team in baseball by tax desirability. It may surprise you to learn the Cubs are the sixth-lowest taxed team in MLB.
|7||White Sox||$ 62,653|
|8||Red Sox||$ 63,201|
|22||Blue Jays||$ 81,223|
To illustrate the difference between teams, consider Giancarlo Stanton, who was traded this offseason from the Marlins to the Yankees. A Yankee pays $97,448 in taxes per $1 million in salary as compared to a mere $39,751 for a Marlin. That is a $58,000 difference. Stanton is due $265 million over the next 10 years (after subtracting a 10 percent cut for his agent), which means he took a $15.3 million pay cut ($58,000 * 265) when he accepted the trade to New York.
Devoted Cubs fans may recall a Wall Street Journal article (behind paywall) from early March in which an agent was quoted as saying “If the Yankees offer $130 [million]…and the Cubs offer $125 [million], most guys would pick the Cubs.” The agent was referring to the Cubs’ recruitment culture (i.e. emphasis on family and comfort), but smart players may also be factoring in the tax savings. Consider that a free agent landing a $130 million contract would pay $5.5 million more in taxes with the Yankees than he would with the Cubs, making the Cubs’ offer more generous based on take-home pay.
Or course, the rankings above will naturally shift over time as states and cities change tax codes. For example, Seattle — currently tied at #1 — is trying to enact a 2.5 percent city income tax that would move the Mariners down to the fifth spot. The Cubs may drop in the rankings if budget woes in Illinois lead to a state income tax hike. For now, however, the Cubs are a surprisingly attractive tax destination.
For those who want to see the math, and I know you both do, my methodology is laid out below. All the raw numbers can be seen in this Google sheet.
First, I looked up the state and city tax rates for each city with a major league baseball team. I only used the highest tax brackets because I was looking for the relative effects on multi-million dollar contracts. I then added the two rates together to create a local tax rate for each MLB city. New York has an 8.82% state income tax and a 3.88% city income tax, so the Mets and Yankees have a 12.7% (8.82 + 3.88) tax rate. Illinois has a 4.95% tax rate, and Chicago has no income tax, so the Cubs have a 4.95% tax rate. Miami and Florida have no income tax so the Marlins have a 0% rate. You get the idea.
The Blue Jays required some special calculations. Ontario has a 13.16% provincial tax rate, yet Canada’s top federal income tax bracket is has a 4% lower than the United States (37% v 33%). So I subtracted the federal difference and assigned the Blue Jays a 9.16% local tax rate.
Next, I calculated how much tax a player on each team would pay on each million dollars in salary using these tax numbers. I began by dividing the season into three distinct blocks: 82 home games, 36 divisional road games, and 46 non-divisional road games. Each of these three blocks used a different tax rate.
Home games are taxed at the local rate of the team itself. For a Cub, the 82 games at Wrigley are taxed at Chicago’s 3.75% tax rate. I will designate this as “HTR” (Home Tax Rate).
The 36 divisional road games are taxed at the average of the tax rates of the four divisional rivals; I could have taxed each nine-game block individually, this method just used fewer spreadsheet cells. I designated this average as the divisional tax rate (DTR) For the Cubs, this would be the average of St. Louis, MO (7%), Milwaukee, WI (7.65%), Pittsburgh, PA (6.07%), and Cincinnati, OH (7.10%).
Finally, the 46 non-division road games use a third figure, which I call the non-division tax rate (NTR). This is the average of the 25 non-divisional teams’ tax rates. Using an average introduces some inaccuracy because teams do not play each non-division opponent the same number of times on the road each year (i.e. one year the Cubs play three games in DC, the next they play four). But I do not have the time or inclination to individually calculate each team, each year based on individual schedules. The NTR average is accurate enough for our purposes.
There are 162 games in a season, so $1 million in annual salary equates to $6,172.84 per game. The tax on each game is obtained by multiplying $6,172.84 by the local tax rate. So the total tax for the entire year is calculated as:
Total Tax (per $1M) = $6,172.84 * [(82 * HTR) + (36 * DTR) + (46 * NTR)]
Because this was intended for entertainment purposes only, my methodology may have some flaws. For example, some states may allow city taxes to be written off against state taxes, thus creating some inaccuracies in my method of combining city and state percentages. Also, Turbotax Canada suggests athletes can alter tax liability by registering themselves as service-providing corporations or pass-through businesses (i.e. the Cubs signing an extension with “Anthony Rizzo Inc.,” a baseball services corporation solely owned by Anthony Rizzo). I am not sure if this is legally possible in the US or how it affects local taxes.
The moral of the story is that the Cubs have another leverage point in addition to all their college football-esque recruiting prowess. After all, every percentage point matters when you’re talking about contracts that run into nine-figure values.
As for the rest of us, here’s to hoping we all get large tax refunds that we can spend them on Cubs World Series tickets in the fall.