The Cost of State Income Taxes

Angles Pay $23,368,000 More Because of State Income Tax Rate

The Anaheim Angels of Los Angeles captured the most sought after free agent this offseason when they signed Albert Pujols to a 10-year, $254 million contract. With a maximum state income tax rate of 9.55% and an additional 1% on income in excess of $1,000,000, CA’s income tax rate is the third highest in the nation, behind only Hawaii and Oregon at 11%. The Angels outbid two teams located in states with significantly lower income tax rates, the Miami Marlins and Pujols’ previous team, the St. Louis Cardinals. This prompted me to question the role state income tax liability plays in the true value of a contract.

To determine the true value of a dollar earned in each of the three states, I used Pujols’ average annual salary of $25,400,000 and the 2012 schedules of the Angels, Marlins and Cardinals to calculate the net income Pujols would earn in each state.

TEAM (NET INCOME) PCT.
MIAMI MARLINS ($15,787,815) 62.16%
ST. LOUIS CARDINALS ($14,988,602) 59.01%
ANAHEIM ANGELS ($14,335,930) 56.44%

As the chart above outlines, for every $1 earned with the Marlins during the 2012 season, an athlete keeps 62.16%. With the Angels, he nets only 56.44%. With the Cardinals in Missouri at a maximum state income tax rate of 6%, the athlete keeps 59%. Please keep in mind the following facts:

• Though Florida does not have a state income tax, an athlete who signs with the Marlins is subject to non-resident tax on income earned in the other states he plays in during the season.

• Because you may deduct state income taxes on federal income tax returns, when an athlete pays a higher state tax, he lowers his federal tax liabilities.  Now that we’ve determined a dollar is worth less when earned in CA, I want to know: how much more did the Angels need to pay Pujols to outbid the Marlins and Cardinals?

TEAM (RATIO) COMPARABLE
MIAMI MARLINS (0.9080) $23,063,200.00
ST. LOUIS CARDINALS (0.9565) $24,295,100.00
ANAHEIM ANGELS (1.0000) $25,400,000.00

As illustrated on the chart above, the Marlins can offer a free agent 90.8% of the Angels’ offer.  In other words, the Angels would need to pay $1.1013 for every dollar to compare to the Marlins and $1.0533 to the Cardinals.  Clearly, taxes play a substantial role in long-term contracts. In the case of Albert Pujols, the Angels would need to compensate the slugger $23,368,000 over 10 years to equal the Marlins and $11,049,000 to compete with the St. Louis Cardinals.

ALAN POGROSZEWSKI is an Assistant Professor of Sports Studies at St. John Fisher College and the President of his own tax consulting business whose clientele include professional athletes performing services on three separate continents. Prior to accepting his position at St. John Fisher College, Mr. Pogroszewski was the Vice President of Business Operations for Sports Consulting Group, a firm that specializes in the representation of professional hockey players. Mr. Pogroszewski received his M.B.A. from Rochester Institute of Technology in 1996 and his M.S. in Taxation from St. John Fisher in 2003

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