Max Scherzer: Did tax breaks seal the deal for Nationals ace?

Washington Nationals pitcher Max Scherzer will avoid state income taxes on most game paychecks – tax savings that could amount to millions of dollars. How much do tax considerations affect where coveted sports free agents like Scherzer decide to play? 

The Washington Nationals' signing of Max Scherzer—one of the best starting pitchers in baseball—ignited a few sports-talk debates: Do the Nationals have the best rotation in the history of the game? Can DC win its first World Series title since 1924? Did the District's tax laws help land the prized free agent?

Okay, maybe "SportsCenter" missed that last one. But the Washington Post reported that Scherzer will avoid state income taxes on most game paychecks with the Nationals—tax savings that could amount to millions of dollars on a contract reportedly paying him $210 million over the course of the deal.

If you're not a fan of both sports and tax policy you might miss how often the two subjects overlap. Sports reporters often discuss the implications of state income taxes as high-profile free agents look for a new team. For example, the Giants and Dodgers (California) were reportedly at a disadvantage in their pursuits of Jon Lester, another star free-agent pitcher, because California has a higher top state income tax rate than the home states of the Cubs (Illinois) and Red Sox (Massachusetts). Lester ultimately signed with the Cubs.

None of this would matter if we were talking, say, plumbers instead of ballplayers because most people pay income taxes primarily based on where they live and not where they work. However, a state or city can levy an income tax on visitors who earn money in their jurisdiction. This is usually difficult to administer, but jurisdictions target individuals like professional athletes whose work is public, scheduled, and highly paid (hence "jock taxes"). Two football players are currently challenging the constitutionality of Cleveland's jock tax because visiting workers in other professions usually don't owe Cleveland income taxes.

A professional athlete is paid during the season—not over the course of the calendar year—and the athlete may pay income taxes for both home and road games in each state his team plays (even if he never takes the field). If an athlete lives in a state with an income tax theyget credits for income taxes paid in other jurisdictions.

Thus, next year Scherzer will pay income taxes when the Nationals play road games in New York, Pennsylvania, and other states with income taxes, but not in Florida, Texas, or Washington (states without an income tax). Scherzer won't pay income taxes for home games in DC even though it has an income tax. Why?

The District is the only jurisdiction with an income tax but no jock tax. Congress allows the District to tax income, but not the income of individuals who work in DC but live elsewhere (under the terms of the Home Rule Act). Representatives from Maryland and Virginia want to keep commuter income tax dollars in their states and, under the US Constitution,Congress can meddle with the District's laws. Athletes such as Scherzer, a resident of Florida, are merely benefactors of this idiosyncratic rule.

The tax savings from playing in a state with no income tax are real but are they a deciding factor? That's a tough question. But two thoughts:

One, sports reporters should stop blindly multiplying the value of a contract by a state's top tax rate. Income taxes are complicated. Professional athletes pay state and local income taxes in multiple states, can credit these taxes against home-state income taxes, can deduct state and local income taxes from their federal income tax, and must calculate (hopefully with an accountant) numerous other complicated tax issues.

Two, it's debatable how much state income taxes affect job and living decisions—for professional athletes and other Americans. Taxes are surely a factor but so is everything from proximity to family to the chances of winning a championship (more so for professional athletes). And prized free agents more often pit teams against each other to get an extra year or two added to their guaranteed contract, not for a few more million dollars. Certainly the Los Angeles Dodgers and New York Yankees continue to attract high-priced talent despite being located in high-tax states.

So is Max Scherzer saving money in DC? Yes. Are the District's tax laws a big reason why he signed with the Nationals? I doubt it.

The post Pitching, Defense, and State Tax Policy appeared first on TaxVox.