When the Cliff Lee saga reached its apex this offseason, a new type of article began to sprout up across the web. Instead of analyzing how Lee projected to perform and comparing his worth to the offers from the Rangers and Yankees, some writers began to calculate which offer would actually prove more favorable given the tax rates of the cities and states involved. Based on the tax codes of different jurisdictions it stood to reason that Lee might actually be able to take home more net compensation in an offer that, on the surface, looked to pay less in salary than another. Naturally, articles that marry my two careers – accounting and baseball – are right up my alley, but given the general confusion that arose from many of these pieces, I felt it prudent to do some research of my own and provide a primer of sorts on what is known as the “jock tax,” as well as some key components of how players are taxed.
For starters, what is the jock tax? To answer, we must take a trip back to 1991, when Michael Jordan and his Chicago Bulls beat the Lakers for the NBA championship. When it became known how much money Jordan stood to receive just from winning the title alone, the state of California decided it made sense to tax his earnings. After all, he earned that money while playing in California, and even though he wasn’t a resident of that state, the Franchise Tax Board felt that his non-resident income earned should be taxable to their benefit. Soon thereafter, Jordan received a tax bill from California. In retaliatory fashion, the Illinois Department of Revenue began sending tax bills to athletes from California who played in Illinois, a tax that became known as “Michael Jordan’s Revenge.” Suffice to say, it was not long before many other states and even local jurisdictions got in on the act.
To read the rest of the article click here