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Rosenthal: Minnesota Tax Rate 2nd Highest in Baseball


Seth Stohs
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https://theathletic.com/1401490/2019/11/22/rosenthal-the-reds-are-interested-in-zack-wheeler-the-braves-big-bullpen-bet-more-notes/

 

In the notes of this Ken Rosenthal article, he writes about the Twins pursuit of pitching. However, the bigger point is that the state tax is second in baseball to only California. It definitely creates a challenge. 

 

 

 

The 9.85 percent rate in Minnesota is second only to California’s 13.3 percent (New York’s rate is higher than Minnesota’s when combining city and state rates, but most players live outside the city).

State income tax rate usually is not a primary consideration for free agents, but in certain cases the best gross deal might not be the best net deal, complicating the decision.

 

Usually we think about how the Twins have to pay more to get free agents to come to Minnesota... 

 

This is probably the bigger, more actual reason that is the case. 

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I think that this is a factor for players who have smart advisers, but would note:

 

1. TX, FL and WA have zero income taxes. Does this help the Rangers, Astros, Marlins, Rays and Mariners score top free agents?

 

2.  My understanding is that states that have income taxes pro-rate income based on time spent in the state. So even a player whose team is in a no tax state will pay taxes in every state where he plays. For this reason, a careful adviser would make a spreadsheet that takes this into account. For example a player in the AL West will play a lot of games in California (the highest tax state) and Texas and Washington (which have no state income taxes).

 

3.  The rest of the AL Central includes states with moderate top rates -- Ohio (5%), Michigan (4.25%), Kansas (5.7%) and Illinois (4.95%).   

 

4.  Assuming that spring training counts, it's better to play for a team that has spring training in Florida (0%) versus Arizona (4.54%). The Twins train in Florida.

 

5.  If the Twins wanted to pay me for 5 hours or so of number crunching, I think that I could prepare a spreadsheet that rebuts the article. 

 

 

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I think that this is a factor for players who have smart advisers, but would note:

 

1. TX, FL and WA have zero income taxes. Does this help the Rangers, Astros, Marlins, Rays and Mariners score top free agents?

 

2.  My understanding is that states that have income taxes pro-rate income based on time spent in the state. So even a player whose team is in a no tax state will pay taxes in every state where he plays. For this reason, a careful adviser would make a spreadsheet that takes this into account. For example a player in the AL West will play a lot of games in California (the highest tax state) and Texas and Washington (which have no state income taxes).

 

3.  The rest of the AL Central includes states with moderate top rates -- Ohio (5%), Michigan (4.25%), Kansas (5.7%) and Illinois (4.95%).   

 

4.  Assuming that spring training counts, it's better to play for a team that has spring training in Florida (0%) versus Arizona (4.54%). The Twins train in Florida.

 

5.  If the Twins wanted to pay me for 5 hours or so of number crunching, I think that I could prepare a spreadsheet that rebuts the article. 

 

While it would require a financial model to sort out the exact financial impact, the difference with all the none tax states averages around 2%. It's not inconsequential on a 100M contract but its also not going to have much impact on our ability to sign FAs. 

 

Where cost of living is concerned, the primary difference will be in housing and that's more of an investment for a ML player than an expense. They are going to most likely sell that house when they move on so the impact is basically the difference in property taxes. Any other cost of living differences are of no consequence.

 

So, I really doubt income tax rates or cost of living has an impact expect the no tax states. An extra $4M (assuming 50% paid in other states) on a $100M contract is somewhat advantageous to those teams trying to recruit FAs.

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Cost of living on the east coast would more than offset the tax variance. I can't believe this is a huge determinant.

If I am being paid 18M a year by the Twins, then I will have to recognize 9M of Minnesota income for tax purposes.  That amounts to a lot of state income tax.  Hopefully I can keep my wife's spending habits under control so that the "cost of living" in Minnesota being lower than New York is not a major factor.  If it is a major factor it will be time to non-tender her and make her a free agent!

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If any reporters who attend team press conferences are reading, maybe you could just ask? I don't see a reason why the team would be evasive in answering a general question like that, something that all player agents are well aware of. ''Does the state income tax rate come up in contract discussions much?"

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If I am being paid 18M a year by the Twins, then I will have to recognize 9M of Minnesota income for tax purposes.  That amounts to a lot of state income tax.  Hopefully I can keep my wife's spending habits under control so that the "cost of living" in Minnesota being lower than New York is not a major factor.  If it is a major factor it will be time to non-tender her and make her a free agent!

I think that perhaps you could allocate some of the $18M to spring training in Florida, which is a no tax state, allowing your wife to at least buy socks and underwear.   :)

 

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If I am being paid 18M a year by the Twins, then I will have to recognize 9M of Minnesota income for tax purposes. That amounts to a lot of state income tax. Hopefully I can keep my wife's spending habits under control so that the "cost of living" in Minnesota being lower than New York is not a major factor. If it is a major factor it will be time to non-tender her and make her a free agent!

Trust me, your Wife's free agency will cost more than any state taxes.

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I think that this is a factor for players who have smart advisers, but would note:

 

1. TX, FL and WA have zero income taxes. Does this help the Rangers, Astros, Marlins, Rays and Mariners score top free agents?

 

2.  My understanding is that states that have income taxes pro-rate income based on time spent in the state. So even a player whose team is in a no tax state will pay taxes in every state where he plays. For this reason, a careful adviser would make a spreadsheet that takes this into account. For example a player in the AL West will play a lot of games in California (the highest tax state) and Texas and Washington (which have no state income taxes).

 

3.  The rest of the AL Central includes states with moderate top rates -- Ohio (5%), Michigan (4.25%), Kansas (5.7%) and Illinois (4.95%).   

 

4.  Assuming that spring training counts, it's better to play for a team that has spring training in Florida (0%) versus Arizona (4.54%). The Twins train in Florida.

 

5.  If the Twins wanted to pay me for 5 hours or so of number crunching, I think that I could prepare a spreadsheet that rebuts the article. 

 

I *think* it is time of residence that matters, and where the income is earned. All players (Twins and visitors) pay Minnesota income tax on the salary they earn when playing in Minnesota. If they are Minnesota residents for a certain percentage of the year, they are also subject to Minnesota income tax, but the rules are complicated for income earned elsewhere. I'm not a tax attorney or accountant, so I don't know the details.

 

A local example, though: Portland (~9% income tax) is located just across the river from Vancouver, Wash., (no income tax), but if I lived in Vancouver and worked in Portland, I'd still have to pay Oregon tax on my earnings because they were earned in Oregon. But in retirement, I'd get a 9% raise by moving to Washington, as long as I could still buy all my stuff in Oregon where there is no sales tax.

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For all who asked for it here's a link to calculate the State Tax Affect

 

Not interested in the Spreadsheet here's what $10M looks like for each team in the 2020 Season

(Yes it calculates based on the Home Team State for every game*)

 

Cost By State   State Tax Affect

 

For those who believe that it costs more to live in some states here's one that is Dollar Value Adjusted based on the home state

 

Cost By State   Dollar Value Tax Affect

 
 
* - I thought about adjusting for the Field of Dreams Game in Iowa (Yankees @ White Sox) or Puerto Rico Series (Mets @ Marlins 3 games) but had spent enough time with this so sue me for not including those adjustments
 
Here's links for where I came up with the rates:
 
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For all who asked for it here's a link to calculate the State Tax Affect

 

Not interested in the Spreadsheet here's what $10M looks like for each team in the 2020 Season

(Yes it calculates based on the Home Team State for every game*)

 

 

 

For those who believe that it costs more to live in some states here's one that is Dollar Value Adjusted based on the home state

 

 
 
 
* - I thought about adjusting for the Field of Dreams Game in Iowa (Yankees @ White Sox) or Puerto Rico Series (Mets @ Marlins 3 games) but had spent enough time with this so sue me for not including those adjustments
 
Here's links for where I came up with the rates:
 

 

This is interesting and I commend you for the work you did to compile this. I did notice one small glitch in the second table; the Mets and Yankees should be listed below the California teams.

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5.  If the Twins wanted to pay me for 5 hours or so of number crunching, I think that I could prepare a spreadsheet that rebuts the article.

 

Excellent stuff, but I think you just gave them the usable Cliffs Notes version for free.

 

Which is OK because the Twins might be willing to pay for Minnesota attorney’s rates, but they’d need convincing to pay LA attorney’s rates.

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I think that this is a factor for players who have smart advisers, but would note:

 

1. TX, FL and WA have zero income taxes. Does this help the Rangers, Astros, Marlins, Rays and Mariners score top free agents?

 

2.  My understanding is that states that have income taxes pro-rate income based on time spent in the state. So even a player whose team is in a no tax state will pay taxes in every state where he plays. For this reason, a careful adviser would make a spreadsheet that takes this into account. For example a player in the AL West will play a lot of games in California (the highest tax state) and Texas and Washington (which have no state income taxes).

 

3.  The rest of the AL Central includes states with moderate top rates -- Ohio (5%), Michigan (4.25%), Kansas (5.7%) and Illinois (4.95%).   

 

4.  Assuming that spring training counts, it's better to play for a team that has spring training in Florida (0%) versus Arizona (4.54%). The Twins train in Florida.

 

5.  If the Twins wanted to pay me for 5 hours or so of number crunching, I think that I could prepare a spreadsheet that rebuts the article. 

Excellent points and you beat me to a lot of them.

 

As for the bolded, I'm like 95% sure ballplayers pay the local state's tax rate during road games (ie. if you play one game in Chicago, that game's earnings pay the Illinois tax rate).

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For all who asked for it here's a link to calculate the State Tax Affect

 

Not interested in the Spreadsheet here's what $10M looks like for each team in the 2020 Season

(Yes it calculates based on the Home Team State for every game*)

 

 

 

For those who believe that it costs more to live in some states here's one that is Dollar Value Adjusted based on the home state

 

 
 
 
* - I thought about adjusting for the Field of Dreams Game in Iowa (Yankees @ White Sox) or Puerto Rico Series (Mets @ Marlins 3 games) but had spent enough time with this so sue me for not including those adjustments
 
Here's links for where I came up with the rates:
 

 

So it seems like Minnesota is pretty much smack dab in the middle. Looks to me like the premise of the article was an assumption that turns out not to be true.

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This is interesting and I commend you for the work you did to compile this. I did notice one small glitch in the second table; the Mets and Yankees should be listed below the California teams.

Thanks...the second chart is ranked by Net Adjusted Value After Taxes (far right column)

 

The value of a dollar in NY is less but the outstanding 13+% state tax in Cali put all those teams lower

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Great stuff, from someone who has rarely met a spreadsheet he didn't like. 

 

(Okay, that's not true -- I've met some spreadsheets which were done horribly, but you get the point.)

 

I think the differences in state taxes could make a difference for wise advisors, but I'm not as convinced on the cost of living piece. The difference in the value of a dollar really only affects the amount they spend. For most people with contacts large enough for the state tax to make a sizable difference, they SHOULD be living on a small enough portion to be investing the bulk of it. 

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