MLB Superstar free agents Bryce Harper and Manny Machado are set to sign record-breaking contracts this offseason. While many things factor into where a player signs, state tax rates can play a large role in such a big decision. State income tax rates range from 0% to 13.3%. Over the life of a $300 million contract, the team that Bryce Harper or Manny Machado chooses could result in roughly $40 million in state tax burden.
State Taxes for MLB Players
Throughout a player’s tenure on a team, the state they play in can have major implications on the net dollar amount received over the life of the contract. This is especially relevant in Major League Baseball because each team has 81 homes games each season. Former St. Louis Cardinal, Lance Lynn, just signed a three-year, $30 million contract with the Texas Rangers. Since the state of Texas has no income tax, the contract Lynn signed provides a greater economic benefit than if he would have signed with a team in a high-income tax state, such as California. However, when the media covers items like this, they often overlook the impact of the state of residency of the player. Even playing for a no-tax state team like Texas doesn’t mean the player pays no tax. They still pay income tax to states in which they play away games and to their state of residence, if applicable.
Taxing Signing Bonuses
The state in which a player lives has major tax effects on signing bonuses included in a contract, assuming proper language is included regarding the signing bonus. Signing bonuses are generally taxed based on a taxpayer’s resident state. This means if a player receives a signing bonus from your favorite team, the signing bonus is taxed in the state the player is a resident and not the state the team is located in. Depending on the circumstances, this can save a player millions of dollars in tax savings.
A full no-trade clause can be valuable to players in more ways than one. If a team decides it wants to explore trading a player with a no-trade clause, the player has control over where they are traded. This clause provides peace-of-mind to players in their personal lives but also protects a player from a business perspective. From a tax planning perspective, a full no-trade clause can allow a player to dictate what tax jurisdiction they will be entering if they are traded during their current contract. In addition, additional compensation can be used as a negotiating tactic when it comes to waiving a no-trade clause.All Insights