MLB's Machado and Harper: "Pass Me the SALT (Burden)"
State and Local Tax (SALT as it's commonly called) is one of the most complicated areas of tax law. State and local governments have also become increasingly aggressive in terms of trying to collect tax on income earned on their turf. Many people aren't aware that state income tax is largely based on where the income is earned, not necessarily where one is a "resident" (a common myth is that just because you're a Florida resident you can avoid paying any state income tax.
SALT implications can mean big dollars for high-income earners like MLB superstars, and the destinations chosen by Manny Machado and Bryce Harper make me wonder whether they gave any consideration at all to their SALT burden. Apparently they didn't, because two of the worst destinations from a SALT standpoint are San Diego and Philadelphia, the respective new home towns for Machado and Harper.
Today's STLTaxLawyer's Five on Fridays focuses on the SALT implications of their decisions.
1) San Diego may be one of the most beautiful places in the US, but hanging your hat anywhere in California carries a tremendous tax burden, with a top income tax rate of 12.3% and an additional 1% tacked on to any income over $1 million. As a Padre, Machado will also play in the NL West, home to the San Francisco Giants and LA Dodgers. So for almost 120 games each year, there is no escaping the CA income tax for Machado. With at least 3/4ths of his $30 million annual salary subject to CA income tax, he could pay at least $3 million each year to the Golden State.
2) There was some chatter of Harper and/or Machado ending up with a mystery team. Some unlikely suitors would have been the Astros, Rangers, or Mariners, any of which would have been SALT-savvy choices. Unlike the NL West, the AL West should be very appealing to a tax-conscious MLB superstar. Three of the five teams play in states with ZERO income tax: the Houston Astros, Texas Rangers, and Seattle Mariners (yes, shockingly the ever-liberal state of Washington still has no income tax). Thus, players on those teams could avoid paying state income tax in almost 120 games/year. Trips to Anaheim and Oakland would be costly though (see #1).
3) City earnings tax considerations: MLB cities with additional income or earnings taxes include Baltimore, Cleveland, Cincinnati, Detroit, Washington, DC, Kansas City, Pittsburgh, St. Louis, New York City, and YES, Philadelphia. These taxes are levied on earned income derived there for non-residents or on all earned income for residents. Philly imposes an un-Brotherly-like tax of 3.98% on earned income. Over the life of Harper's 13-year/$330-million contract, he could pay PHI city earnings taxes of more than $13 million!
4) In addition to playing home games in Philly, Harper will play approximately 20 games each year in New York City and Washington, DC, two of the US’s highest taxing cities. To add insult to injury, the Phillies regular inter-league rivalry series happens to be with the Boston Red Sox, another sock in the gut from a tax standpoint. While the Rays/Marlins interleague rivalry may not be sexy, or even remotely interesting, it certainly is the least taxing for the participants.
5) As the "STLTaxLawyer" I'd be remiss to ignore whether the St. Louis city earnings tax (1%) dissuaded Machado or Harper from coming here. Given their tax-unwise choices, probably not, but it couldn't have helped. To attract future tax-smart free agents, maybe Cardinal fans should band together and call for the repeal of the earnings tax, if for no other reason but to eliminate a disincentive for choosing the Lou. KC might follow suit. While we're at it, let's dump the state income tax. With those changes and resulting flood of future free agents to the Show-Me State, another I-70 World Series might just be in our near future.