April is, of course, income tax month. Those taxes you’re dutifully calculating and filing may be painful to you personally, but chances are they’re having an even bigger impact on your favorite sports team.
Now, any discussion of income taxes — or changes we could make to them for the sake of our sports teams — depends on understanding the reality of today’s income-tax system.
Many opponents of any given income tax reform plan will argue that the reforms disproportionately favor the rich. But this complaint generally shows an underlying confusion over the nature of where tax revenues originate.
The top 1% of earners provide about 27% of total income tax revenues; the top 10% provide about 70% of total income tax revenues; and the top half of all income earners provide about 97% of total income tax revenues.
So just about any tax reform that reduces taxes will favor the wealthy — because they are the ones who pay the majority of taxes to begin with.
This is no different from complaining that a policy to eliminate potholes would disproportionately favor drivers.
So how does this relate back to sports? Nearly all professional athletes — at least those in the four major American sports leagues — would qualify as “high income” by most measures. And these athletes, perhaps as much as people in any occupation, confront location as a factor in deciding where to work.
Free agents often consider several teams across several different states when deciding where to sign.
As such, it’s a fair question to ask: Do athletes consider state income taxes when deciding which team to play for?
While the bulk of any individual’s income tax burden will typically be at the federal level, state (and sometimes local) individual income taxes also exist, and can vary substantially from place to place. On the one side, seven states — Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming — have no individual income tax. On the other, California has a top marginal income tax bracket of 13.3%.
It’s worth thinking through an athlete’s decision to sign a contract as a free agent. Like all big decisions, there are a lot of factors to consider.
Athletes usually like playing for winning teams.
Some have a preference for or against certain areas of the country for non-financial reasons, like the climate.
Compensation certainly matters.
Cost of living matters too, although perhaps not very much, because athletes’ spending on “necessities” could constitute a rather small percentage of their overall income.
Do the math.
The impact of state income taxes, however, could be considerably more important to a high-income individual. Consider a baseball player with an income of $2,000,000 — modest by Major League Baseball free agent standards — and a sales representative with an income of $50,000. Both are considering a move to either California or Texas. (Assume each to be a single filer in 2016.)
Life in California would cost the sales representative, an additional $1764 in taxes — about 3.5% of her income, in additional income taxes.
The same choice to live in California would cost the baseball player nearly a quarter million in additional tax dollars —roughly 12% of his overall income.
This is not to trivialize a 3.5% average tax rate increase on the sales representative; it is to show that an income tax discrepancy has a much greater effect for high-income athletes as compared to ordinary Americans.
(This is a bit of an overstatement, as so-called “jock taxes” require athletes to actually pay income tax in every state in which they play. Still, with half of an athlete’s games played at home, the home state’s income tax rate would dominate the ultimate tax bill. If our hypothetical baseball player signed in California and played half of his games in tax-free states, the overall tax bill would come to about $108,000, or 10.8% of income.)
As such, we would expect state income taxes to play a large role in determining where free agents choose to sign.
And they do.
Economists Justin Ross and Robert Dunn looked at MLB All-Stars and found that states with higher tax rates led to higher salaries, implying that franchises in higher income-tax areas need to offer higher salaries to offset the additional tax bill to the player. A separate study of European soccer leagues found that countries can successfully attract foreign players through a favorable, foreigner-specific tax policy.
As many cities have shown (Las Vegas most recently) the prevailing wisdom is that an increase in public expenditure is needed to try to attract and retain winning sports franchises. But if athletes are sensitive to tax policy, perhaps the path to victory goes the opposite direction — toward lower taxes and spending, not more.
 The top tax bracket of 13.3% kicks in at $537k in California. At $2M, the calculated tax liability in California is $231,793.40. At $1M — half the games in California and half in a tax-free state — the calculated tax liability is $108,793.40. This would basically be the lowest a California baseball player making $2M would have to pay (and baseball teams in both leagues actually have to have road games in California, so the $108k figure is too low).
 The decision to look only at All-Stars is a particularly savvy one — not all MLB free agents may have several contract options, but presumably the better ones do.