No State Tax Makes Dollars & Sense to Potential Free Agents
What type of advantage does the NHL expansion team in Seattle have in signing free agents in the open market?
The Seattle Kraken officially became the National Hockey League’s (NHL) 32nd franchise on April 30th, 2021. The franchise’s expansion draft is scheduled for July 21, 2021. At that time, 30 players will be selected as members of the franchise. Once selected, their salaries will be paid by Seattle and most of their income will be earned in the state of Washington, where the players will likely be considered residents for income tax purposes.
The state of Washington does not impose an income tax on its residents, one of nine states in the United States to do so. The others with NHL teams are Florida, Nevada, Tennessee, and Texas, which provides the teams located there an inherent financial advantage as their players will take home a higher percentage of their salaries.
Contracts in Terms of True Value
While teams and representatives negotiate the total salary of a contract, I’ve stressed in several previous articles that it’s the true value after tax that is of greatest importance https://afptax.com/blog/what-is-the-jock-tax-index/
While all athletes incur federal tax liability on their earnings, their exposure to state and local taxes will be dictated by a team’s home and road schedule. For example, this upcoming season, a player in the National Hockey League (NHL) will potentially play in 24 US jurisdictions while also playing in four additional Canadian provinces. By analyzing each team’s home and away schedule a player’s unique tax liability can be determined.
To measure the advantage the Krakens’ players will receive for playing in Washington, we first need to determine the team’s schedule for the upcoming season. Although the Kraken are not exposed to any resident tax in Washington, they will be taxed as non-residents on any road games played in a state or city that levies tax. Therefore, knowing where Seattle will play their road games will determine a player’s exposure to non-resident tax.
Quantifying the Advantage
Without knowing the exact schedule, it is not possible to determine definite dollar values, but an estimated schedule can be composed. The estimated schedule can then give an approximate net value for new contracts signed with the franchise as well as increases in net value players could earn by being drafted in the expansion draft.
One unrestricted free agent who will be on the market and has reportedly drawn strong interest from Seattle is Carolina Hurricane Dougie Hamilton. In determining Hamilton’s market value, we have slotted him above Alex Pietrangelo, who signed with Vegas for $61.6 Million over seven years during the 2020 offseason. As a benchmark, we also included scenarios of him signing with his current team in Carolina and the Los Angeles Kings to emphasize the tax benefits Seattle offers.
In comparing Hamilton’s after tax value on this potential contract proposal with the Kraken to that of the Carolina Hurricanes and Los Angeles Kings, the value on his contract is worth $2.7 million more than the same deal with his current team and nearly $7 million more than the same proposal with the Kings. Therefore, in order for the Hurricanes to match the same after tax value as the Kraken, they would need to up their proposal to nearly $68 million and the Kings would need to offer almost $77 million.
Players Drafted in Expansion Draft
Free agents who sign with Seattle are not the only ones to benefit. Players exposed and selected in the expansion draft by Seattle, in nearly every case will benefit financially. Although there is no certainty to the players Seattle will ultimately select, there has been plenty of speculation. The following three players are hypothetical examples of how their selection would change their financial situation.
As the chart above indicates, from purely a financial standpoint, players should want to be drafted by the Kraken. In the case of Price and Tarasenko their net income would increase by 11% and 10% respectively. The economic gain from a player being drafted from another team in a tax-free state will be relatively small and in the case of Yanni Gourde the gain would be less than ½ of a percentage.
Seattle can be successful and has the blueprints to follow. Vegas who entered the NHL in 2017 leveraged their tax advantage and the expansion draft to compete right out of the gate. Some players may see being drafted in the expansion draft as a negative but if they are looking to maximize their earnings, they should be hoping to be drafted by the Seattle Kraken.AFP Consulting, Free Agents, jock tax, NHL, Seattle Kraken
January 1, 2012
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