An Empirical Look at State Income: Taxation of Major League Baseball Players

Abstract

The large increases in athletes' salaries have prompted states to exercise their rights to tax nonresident professional ballplayers. The general trend has been for each state to levy its tax rate on part of the salary of each player for games played within the state. The result is a complex system with extra burdens for players, owners, and states. In response some of the constituencies and the Federation of Tax Administrators have proposed that all states adopt the same methodology for taxation. This paper summarizes the evolution of the system where states tax nonresident athletes. It also presents the impacts of some of the proposed tax polices and provides insight as to the direction of future tax policy. The varied state tax polices affect players, team owners, and states. Every player has to comply with multiple tax codes, each with a different tax rate and possibly a different system for allocating how much of the player's income is taxable. State tax administrators are affected because they need to determine how much income should be taxed, which tax payments should be offset by a credit, and if the correct amounts of taxes have been paid. These effects are more complicated when multiple state tax laws and rates are applied to a tax return. Furthermore, the chance of error in making a determination rises as the process becomes more complex. Team owners are affected because they must supply tax information about their players to numerous states. However, a stronger impact is that different taxing methods may affect a team's position when negotiating salaries with players. On the surface a team in a state that has a zero or low income tax rate has a recruiting advantage; however, that argument is not as effective if other states tax part of the players' incomes. TERMINOLOGY To facilitate the explanations and discussions, this section summarizes four methods for taxing professional athletes. The first three are the home state method, the games played method, and the duty days method. These methods are so named by a tax attorney, Jeffery Krasney, in an article advocating standardization of the tax treatment for athletes. (1) The fourth method, the tax credit method, is the tax policy currently in force in many states; the current authors propose its name. 1. The home state method: An athlete's entire income is taxed only by the state where the athlete plays home games. 2. The games played method: Each state taxes an athlete on the number of games the athlete plays in the state. 3. The duty days method: The amount of tax paid by an athlete to a state is based on the number of days that the athlete is contractually obligated by his team to spend in the state. 4. Tax credit method: Each state taxes the entire income of athletes who play home games in the state, but the tax is reduced by a credit equal to the amount of income taxes paid to other states. Each state also taxes the income of athletes of teams based in other states, and the amount of tax is related to the number of games played in the state. HOW IT ALL BEGAN Each state has had the right to tax nonresidents on income earned in the state since a 1920 federal court decision. (2) However, during the era in which athletes' salaries were held well below the free market level with such arrangements as the reserve clause, states had little incentive for taxing nonresident athletes. Rather, states routinely used the home state method of taxing players, in which all of a player's income was taxed in the state in which his team was located. The only wrinkle to this policy was the situation in which a player played for a team in one state but claimed a different state as his domicile. In these cases players were often levied an income tax in both states, although it was not uncommon for tax credits to be granted by the domicile state for taxes paid in the state of employment. Regardless the ultimate result was that the home state method applied--that is, only the state where the athlete played home games taxed the athlete's entire income. …