MLB contract negotiations are well underway for baseball’s free agents.  Many players have already been signed.  For example, David Ortiz re-signed with the Red Sox and Torii Hunter signed with the Tigers.  However, many other players are still in the process of negotiating, including Josh Hamilton and Zack Greinke.  For a complete list of the MLB free agents and their expected destinations, click here.

For the players who are still negotiating, many factors may be considered.  Teams may consider “hefty contract[s], injury history [and] a player’s clubhouse reputation.”  An article published by the MLB details the factors that teams may consider in negotiations with specific players.  Teams are also now taking “sabermetrics,” advanced statistics about players, into consideration.

Players traditionally consider factors such as salary and contract length.  However, an article by the Associated Press has predicted that a new factor may be considered during MLB contract negotiations this offseason: the tax increases that are expected at the start of the new year.  As a result of the Affordable Care Act, the changes will include an increase of 0.9% in Medicare tax for individuals with a salary of $200,000 or higher.  As the minimum salary within the major league is $480,000, this increase will affect every player.  As a result, contract negotiations may incorporate increased signing bonuses, so that the players can get as much income as possible before the tax increases take effect in January.

The increased federal taxes may also affect the players’ interest in certain teams.  With federal taxes increasing, the teams that are based in states with lower state taxes may be at an advantage when contracting with highly desired players.  For example, states like Florida and Washington, which do not have a state income tax, may be at an advantage over states like California, which as a 10.3% income tax.  Jack Zdurienck, the general manager for the Seattle Mariners, was quoted in the AP article as stating, “[w]hen we sit down with players, that’s a huge benefit.  I think any player out there that has an opportunity to play in a no-tax state gets benefits, enormous benefits.  We hope that weighs in our favor.”

The AP article included an example, provided by a tax lawyer, to illustrate the potential consequences of the tax increase on baseball players.  A player in Florida with a $10 million salary will see a $640,000 increase in taxes.  If that player were traded to a team in California, he would see an increase of $950,000.

It remains uncertain exactly how much the tax increase will affect contract negotiations.  It may be a factor, but it is uncertain if it will be so significant as to change players’ destination teams.  As the AP article states, “[i]n the end, most free agents choose teams based on where they want to play, not on lowering the tax cut on their income.”  However, it is also possible that we are now dealing with an entirely different game.

— Samantha Taylor

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10 Responses to The Old Ball Game…a new consideration in MLB contract negotiations

  1. Jeremy Gove says:

    That is an interesting point about contracts. It was noted that in the RA Dickey trade from the New York Mets to the Toronto Bluejays a big consideration was the huge difference in income taxes between Canada and New York. I think that this occurs far more than was previously observed. When every aspect of a contract is combed over by agents and lawyers, taxes are bound to come up. As previous commenters have noted taxes pervade every aspect of sports, from stadiums to salaries, and its just a result of money being involved.

  2. Tracy Hancock says:

    I’d like to think that the players aren’t always looking at solely the bottom line. I’m sure some players only care about money, but I suspect that lots of players care about the likelihood of winning a championship with a given team.

  3. Jacob Marshall says:

    Very prescient post. Quick-hitting bonus agreements do offer MLB clubs with plenty of cash on hand an efficient way to bolster their offers to free agents. For example, the Toronto Blue Jays recently extended RA Dickey for two years (he had one year remaining on his contract). However, part of the deal is an immediate signing bonus, which some analysts wondered was a way to help mitigate A) increased taxes once Dickey moves to Canada and B) uncertainty in American tax law once 2013 hits. After the Marlin fire-sale this year, public money for stadiums is probably gone; maybe tax codes will be the new way for states and municipalities to subsidize major sports.

  4. Jake says:

    Although some states may lack an income tax regime, that does not necessarily mean that their residents pay less in taxes than residents from states with an income tax. As all states must generate revenue, they do so through a variety of taxes such as income, sales, property, license, fuel, estate, etc. In states that have eliminated the income tax, perhaps they employ higher sales, property, and other taxes to compensate for having no income tax.
    Whether or not players pay considerable attention to the effect taxes will have on them remains a mystery, though. As R.L noted above, Josh Hamilton decided to leave Texas (no state income tax) for California. Perhaps Hamilton’s decision was driven by his enormous salary, and not the tax implications of moving to the Golden State.

  5. Sonal says:

    Tax uncertainty continues for everyone in many ways, but does it matter less in certain professions? When you’re constantly on the road and have such disposable income to the point where you can have multiple houses, does it matter where you ultimately choose to play unless you have a special connection to that place? It’s an interesting contrast to those who make less and have to make a more concrete decision as to where they end up settling down.

  6. Emma says:

    Unfortunately, the tax uncertainty continues for everyone. It seems at least some athletes are in a much better position to negotiate ways to get paid in 2012 in order to avoid the 2013 uncertainty. This post reminded me of the situation facing lawyers and others who expect bonuses and are really hoping to receive them before the end of the year.

  7. Michael Joshi says:

    It is possible the tax statistics you mention already factor this in, but most of these professional athletes pay state taxes in every state in which they play ( Sure, they play about half of their games in their home state, which makes a difference, but the tax situations of these professional athletes is substantially more complicated (maybe too much so) than just where they play their home games. Between the A’s and Angels in their division plus occasional games against the Dodgers, Giants, & Padres, even a Mariner’s player is going to owe significant taxes to California each year. It would be really interesting to find out from players how many of them take state taxes into account when making decisions about where to play.

  8. R.L. says:

    It doesn’t look like taxes played a big part in the Josh Hamilton deal. Word is the Rangers offered him 4 years $108 million, while the Angels signed him for the equivalent of 5 years $118 million after taxes.

  9. Joel says:

    Anibal Sanchez decided to stay in Detroit for $80 million over 5 years. Given Michigan’s flat income tax of 4.35%, he’ll pay almost $3.5M to the state in taxes.

  10. Thomas McFarland says:

    I think this was a really interesting and timely article. MLB winter meetings are right around the corner and free agency is in full swing. Not only that, but the death of Marvin Miller, the first head of the MLBPA who nearly singlehandedly won the institution of free agency for Major League players (and by extension all other professional athletes) makes it even more appropriate. While I agree that players, in the end, will choose their teams based on where they want to play, I think the tax implications will play a role going forward-particularly those athletes who are making their decisions solely on salary (as opposed to chances of winning a championship, for example). There already are examples of people in the sporting world trying to game the system for tax purposes. Many people believe one of Sean Payton’s main reasons for moving his family to Dallas a few years ago was motivated by fact that Texas has no state income tax and Louisiana’s is rather high. It remains to be seen if high profile free agents will be able to take advantage of systems like these the way coaches do. Lastly I think the quote by the Mariners’ GM is rather interesting considering the team’s pursuit of slugger Josh Hamilton coupled with their recent failures to attract “superstar” free agents since its a relatively smaller market.