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On Monday, the Texas Rangers signed All-Star shortstop Corey Seager to a 10-year, $325 million contract, a deal that his former team, the Los Angeles Dodgers, likely could have matched. Valued at $4.62 billion, the Dodgers are MLB’s third most valuable franchise, behind the New York Yankees ($6.75 billion) and the Boston Red Sox ($4.8 billion). But the Dodgers would have needed to pay Seager as much as $76 million more to provide him equal value after taxes. The team could have also risked confronting potential salary limitations in the next CBA.
By signing with the Rangers, Seager chose a team located in one of nine U.S. states without a tax on wages (Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming—though New Hampshire and Tennessee tax investment income). If Seager, who was raised in North Carolina, resides in Texas, he will not pay any state income taxes.
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Seager will still have to pay other income-related taxes. Almost all of his salary—the amount exceeding $622,051 if he and his wife jointly file—will be subject to the highest federal income tax rate (37%). And, should the “Build Back Better” bill become law, Seager would face escalating federal surcharges on wages in excess of $10 million. Plus, if Seager resides in a state with an income tax, he would need to pay that tax, too. Seager also faces payroll taxes and, in certain cities and states, jock taxes as a visiting Rangers player. That said, Seager is joining the AL West, a division where three of the five teams—the Rangers, Houston Astros and Seattle Mariners—play in states without an income tax.
For the Dodgers to have provided Seager equal “take home” pay, the team would have needed to offer him as much as $401 million. This is mainly because of California’s state income tax, which is the highest in the country. The state imposes a 13.3% tax on those who earn more than $1 million a year. It also reflects the interaction between him earning more and paying more in federal income taxes, since a portion of each dollar he earns is taxed by the IRS.
The calculations would be different if Seager stayed with the Dodgers but resided in a state with no taxes or lower taxes, though he would still pay a substantial amount to California. We acknowledge there are factors other than money at play in Seager’s decision. Family considerations, expectations for the team, quality of life, proximity to relatives and friends, among other considerations, likely influenced his decision. Even financial considerations are not as simple as calculating taxes. He might have landed more lucrative endorsement deals by playing in Los Angeles. But his housing and other cost-of-living expenses will be lower in Arlington, Texas. What is certain is that his take-home pay will be much higher in Texas than in California.
Seager’s decision highlights how teams in states with higher income taxes might be disadvantaged should MLB and the MLBPA negotiate greater penalties on teams with high payrolls. MLB has proposed lowering the threshold for the luxury tax from $210 million to $180 million in exchange for a requirement that teams spend at least $100 million. With a potential lockout that could begin as soon as Thursday, it’s unclear what provisions the next CBA will contain. But to the extent teams are penalized for spending money, those in higher income tax jurisdictions (California, Minnesota, New York, Washington D.C., Wisconsin) might feel the penalty more acutely. This is not a new phenomenon in pro sports. NFL, NBA and NHL teams are subject to salary caps while being located in jurisdictions with varying income tax rates. But it demonstrates how income tax laws and collectively bargained payroll policies operate in the same space.
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