Don’t Tax Me, Bro: The Impact of Taxes on Free Agents

Tuesday marked the first day of free agency in the NFL, meaning players without a contract could officially begin negotiating with teams for the upcoming season. I was watching some of the NFL Network’s coverage of free agency this afternoon and heard the analysts mention an oft-forgotten factor: taxes.

Thanks to his move to Miami, LeBron won't be paying taxes for dunks like this.

Nine states do not have an individual income tax, and four of those states (Florida, Tennessee, Texas, Washington) are home to major professional sports franchises. That means athletes signing to play for teams in these states could save a lot of money that would go to Uncle Sam elsewhere.  Some say the absence of taxes will have an impact on where Peyton Manning signs.

How much do taxes mean to athletes already making millions? Taxes may have played a role in LeBron James’ “Decision” to sign with the Miami Heat in 2010. Even though James could have gotten a bigger contract had he remained with the Cleveland Cavaliers, income taxes would have cost him $9,900 per game with the Cavs and nearly $25 million over five years. Yet because Florida has no such income tax, James could keep all his money by signing with Miami. This likely wasn’t the deciding factor in James’ decision, but he is pocketing more money in South Beach than he would in Cleveland or New York City.

Manning and James are not the only athletes who have Tax Day on their minds when inking free agent contracts. Cy Young Award winner Cliff Lee was a free agent target for the Yankees in 2010, but Lee and his wife Kristen were rumored to be weary of New York’s high tax rate. Lee eventually settled with the Philadelphia Phillies, and Pennsylvania’s flat tax rate of 3.07-percent allows Lee to keep most of his money.

So how much of a factor are taxes in free agency signings? Studies seem to show states with low income taxes sign better free agents than states with higher income taxes. One study found that in the NBA, the cities with the 10-highest tax rates had a combined winning percentage of 39.3-percent in 2010-11. Meanwhile, the cities with the 10-lowest tax rates had a combined winning percentage of 57.8-percent.

Another study — this one with much more data and mathematics — by Timothy Zimmer looks at how tax policy in different NBA cities impacts teams’ success. Among Zimmer’s findings was an inference that teams located in states with higher taxes “impose a burden on the ability of team ownership to attract the best resources in order to achieve success.” Translation: Athletes want to keep their money, and taxes are a hard sell in luring free agents.

Of course there are a number of other factors that go into a player’s decision to sign with a team. Playing time, coaching, fan support, location, weather, traffic, etc. There are any number of reasons why a player chooses one team over another. In most cases taxes are likely not high on the athlete’s list of considerations when signing free agent deals, but don’t overlook their impact on the sporting landscape.

Photo (cc) by Keith Allison and republished here under a Creative Commons license. Some rights reserved.

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