MLB’s Looming Lockout, Tax Hike Primes Market for Free-Agent Frenzy

·3 min read

Star MLB players have two reasons to negotiate a new contract over the next couple of weeks: the twin threats of a lockout and a federal income tax hike.

The current CBA will expire on Dec. 1, and unless MLB and the MLBPA reach a new deal, the league is expected to lock out players the following day. That would effectively freeze offseason activities that involve players, including signings. Depending on subsequent negotiations and potential litigation, MLB and MLBPA could remain in a labor dispute into 2022. Spring training is scheduled to start on Feb. 26, and Opening Day is set for March 31.

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A labor dispute that ends shortly before the start of the season, one agent tells Sportico, could spark a chaotic situation. Teams would rush to sign free agents and possibly give players and agents less time to weigh offers. That frenzy might benefit some players while others lose out as teams act quickly, opting not to wait around. One front office executive, contacted by Sportico, shared a similar perspective, noting that some agents likely believe they would thrive in the “chaos” of a post-lockout period, while others will prioritize stability and strike a deal this month.

Adding to the uncertainty are the “known unknowns.” It’s impossible to know currently the terms of a future CBA, for instance. But there will certainly be differences, perhaps massive ones, that impact player compensation.

Another wild card is whether Congress passes, and President Joe Biden signs, the “Build Back Better” bill. The House of Representatives passed the bill (H.R. 5376) last Friday by a vote of 220-213. The bill’s prospects for passage in the Senate are questionable, but if the current version advances, some players will see their taxes rise in 2022.

To that point, the bill contains a 5% surcharge on modified taxable income exceeding $10 million. The percentage rises to 8% on modified taxable income that exceeds $25 million. Although relatively few American taxpayers will be affected by these changes, that select group will include some MLB players and other high-earning athletes and entertainers.

Each offseason, several marquee MLB free agents or soon-to-be free agents sign multiyear contracts that comprise lucrative singing bonuses. Mookie Betts’ 12-year, $365 million contract with the Los Angeles Dodgers included a $65 million signing bonus, while teammate Clayton Kershaw’s three-year, $93 million deal contained a $23 million signing bonus. Meanwhile, Francisco Lindor’s 10-year, $341 million deal with the New York Mets featured a $21 million signing bonus, and Jon Lester netted a $30 million signing bonus when he signed with the Chicago Cubs.

To illustrate how the tax increase would impact a current free agent, consider Dodgers shortstop Corey Seager, one of the top free agents available this offseason.

If Seager signs a multiyear contract before year end that includes a $45 million signing bonus, paid in 2021, we calculate his federal tax on the bonus to be $16.65 million. But if he waits until 2022 to sign an identical contract, and if the current version of Build Back Better becomes law, the tax figure would jump to $19 million, a difference of $2.35 million.

To be sure, new CBA terms and higher federal income tax rates aren’t the only factors influencing a player’s plans. Athletes often weigh opportunities to join winning teams or to reside in cities that are appealing for personal reasons. And, as we have previously written, significant differences in state income tax rates, and accompanying residency considerations, are also key factors.

But like in any potential transaction, a change in circumstances on the ground will change the value of the transaction. With clouds above, some players might wish to sign soon rather than take their chances on what awaits in 2022.

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