The Battle for Cliff Lee (Texas and Taxes)

Let’s start with basic principles.  The first state to get a crack at Cliff Lee’s income is the state where he lives.  Cliff Lee currently lives in Arkansas.  Arkansas has a state income tax, with a top rate of 7%.  So long as Cliff Lee resides in Arkansas, he’s going to have to pay state income taxes regardless of whether his baseball team is based in Texas or New York.

Of course, it’s possible for Cliff Lee to move his family to Texas, in which case he won’t have to pay income taxes to Arkansas.  But Cliff Lee can do this even if he plays for the Yankees.

If this sounds simple to you, good!  Because I’m about to make things a lot more complicated.

Certain states impose income taxes on people who work in that state but live in another state.  These taxes are called “nonresident income taxes”.  I bet a lot of you are familiar with these taxes.  If you live in New Jersey or Connecticut and work in New York, you’re subject to New York’s nonresident income tax scheme.   New York’s top income tax rate is 6.85%.  So if Cliff Lee works in New York, his income earned in New York is going to be taxed in New York regardless of whether he lives in Arkansas or Texas.

Let’s make this more confusing.  Even if Cliff Lee pitches for Texas, he’s going to have to pay New York’s nonresident income tax.  Why?  Because regardless of the logo on Cliff Lee’s jersey, sometimes Cliff Lee pitches in Yankee Stadium.  If Lee performs in New York, he’s subject to the nonresident income tax.  It doesn’t matter whether he pitches for the home team or the visitors.

This is the situation for every major league baseball player.  When Derek Jeter plays in Anaheim or Oakland, he becomes subject to California’s nonresident income tax.  If the All-Star Game is held in Chicago, every all-star becomes subject to Illinois’ nonresident income tax.   Most baseball teams are located in states with non-resident income taxes.  The only exceptions are the Mariners, Marlins, Rays, Astros and Rangers.

You have to pity the poor guy who prepares  Derek Jeter’s tax returns (or envy him, since he probably makes a lot of money).  Half of Jeter’s Yankees salary is taxed by the State of New York.  But Jeter plays 9 games each year in Boston, so Massachusetts gets to tax 1/18 of this income.  If Jeter plays three games in Oakland and four in Anaheim, then California gets its share of 7/162 of Jeter’s baseball salary.  Of course, these fractions need to be adjusted if Jeter plays in the All-Star game or makes it to the post-season.  To make things worse, there are cities such as Cleveland and Philly that impose city income taxes on nonresidents.  And when Jeter travels to Toronto … well, let’s leave Canada out of this discussion.

But let’s turn our attention back to Cliff Lee.  Regardless of where Lee plays or lives, he’s going to pay state income taxes to a bunch of different states, and he’s going to file state tax returns that will probably take up the better part of a file cabinet.  But there are things Lee can do to reduce his overall tax burden.  For example, Lee could remain with the Rangers and move his family to Texas.  If Lee’s residence and team were both based in Texas, Lee would not face state income tax liability for the 81 games he played each year in Texas.  In addition, he would not pay state income tax to any state for the games he played in Tampa Bay and Seattle (which, as you doubtless remember, are both located in states that don’t have an income tax).

But if Cliff and Kirsten Lee remain residents of Arkansas, it may not matter from a state income tax standpoint whether Lee remains a Ranger or joins the Yankees.  So long as Lee resides in Arkansas, he’ll owe state income taxes to that state for all of his income, regardless of where he earns it.  True, if Lee becomes a Yankee, he’ll play 81 games in New York, and that will increase the amount of nonresident income tax he’ll have to pay to the State of New York.  But whatever Lee has to pay to the New York tax collector can be deducted from what Lee has to pay to the authorities in Arkansas.  So long as Arkansas has a higher income tax rate than the one in effect in New York, Lee’s overall income tax burden will not be affected by wearing pinstripes.

That is, so long as Lee remains a resident of Arkansas … and does not move to a state with a lower tax rate than the one in effect in New York.

(The amount of money in the Arkansas State Treasury WILL be impacted by Lee’s decision … but that’s a topic for another post on someone else’s blog.)

I’m certain all this is perfectly clear.

Now, about that report that Lee was recently seen buying cowboy boots …

18 thoughts on “The Battle for Cliff Lee (Texas and Taxes)

  1. but what about Pavano? Does he pay the non-resident taxes when the Yankees played in Ca, while he was "rehabbing" in Florida? Or would rehabbing be considered work, forcing him to pay NR taxes while in Florida? (which would lead one to think that all rehab facilities should be in Tx, or some other state with NO state tax.)

    Never thought tax law could be "fun." Thanks for defusing and debunking a fallacious arguement.

  2. If I'm doing my napkin calculations right (and math is nt really my strong suit) the difference on the median value of what Lee would get (say 5 years $130 million), would be about $15 million total, give or take a couple million dollars, over the 5 years. Add in the extra money in endorsements Lee would make in New York and you're probably knocking it down closer to $10 million over 5 years.

    In other words, a difference the Yankees can easily make up no matter what the final cost of Lee is.

  3. Jay, those are good questions, and I don't know all the answers. I can add more questions: what about games in spring training? Florida is one of those states with no income tax, so it might be dilute the nonresident tax owed to (say) California if spring training games counted as real games. What about a visiting pitcher who makes the trip to Yankee Stadium but doesn't pitch in a particular series? What about someone like Roger Clemens, who wasn't always required to travel with the team?

    Please understand, I wasn't trying to provide a precise guide to this topic. I don't have the tax expertise, for one thing. My point is that this area is a lot more complicated than you might suspect.

    Brien, I don't follow your math, but I agree with your conclusion. I purposely focused just on Lee's state income tax bite and did not try to drill down to the ultimate income tax cost of playing and living in NY. But NY's state income tax rate of 6.85% multiplied by your $130 million total salary would be around $9 million. Also, Lee's state income taxes can be deducted from his income on his federal income tax, so his bottom line tax hit would be somewhat less than it might first appear from just looking at the various state income taxes.

    • Didn't even think of spring training. And I DID get your point, that there is more to it than in the first simplistic posts. Which, I must admit, had me sucked in, until you brought out these details. And good catch on the fact that higher state taxes get taken off one's federal tax return.

      OTOH, and I don't know about Texas, but most states "without" state taxes still get their money some way – either thru high property taxes or virtually punitive sales taxes. Course, I doubt if NY is going to win any comparison of taxes and tax rateswith anyone or anyplace in this hemisphere. ;)

      • Jay, true enough, states have to get their funding from somewhere. I don't know how Texas does it; I've heard that their property tax rate is high, but I have not verified that. By the way, if I moved from California back to NY, I'd consider it a tax holiday!

        • Well:

          1) Texas doesn't spend very much money on that frilly nonsense like public education, Medicaid, good roads in less densely populated areas, and so on.

          2. Texas does make a pretty hefty sum on royalty fees on oil extraction in the state.

  4. Here's a question. If you are on paid vacation, do you get taxed if you are vacationing out of state? In theory, you are getting income, yet you are not working.

    Anyways… I may be totally wrong on this, but why would Cliff Lee care about money that much? If his yearly salary came in $100 bills, it would take quite a while to count them.

    • DPR, are you asking what would happen if you or I took a paid vacation? Nothing. You are on vacation. You're not working. To be honest, I think nothing's going to happen if you work in NY and your boss asks you to spend a week helping out in the Atlanta office. Don't quote me on this, but the states aren't looking at your tax liability and my tax liability the same way that they look on the potential taxes they can collect from athletes.

      As for why Cliff Lee would care about money so much? I don't know that he does. But as a whole, wealthy people like to become wealthier. You can call this greed if you like, but I think people care about being paid what they're worth. I don't think less of Cliff Lee because he's looking to collect a bigger paycheck. The Lees are involved in charity work; the more he's paid, the more he can give to charity. That's tax deductible, too.

      • Thank you. Nice to know that there's no extra complication here.
        As for "what they are worth", I guess some people do like to say "I'm getting paid $___ a year" in front of their friends.

  5. Cliff can probably just pay someone to find enough loopholes to get him out of paying taxes altogether. All the cool kids are doing it.

    • You're becoming too rational. The push to dissociate yourself from the pain of losing in the playoffs has cut off all emotional ties with anything. You're now a sabermetrician.

  6. This is NOT going to come down to a matter of taxes. Lee will be a Yankee whatever it takes. Period. It might have been different had he had the "warm fuzzy glow of a WS Championship" with the Strangers, but he did NOT. He's been planning to be a Yankee for over a year, plus there's his and his Families close ties with the Sabathia's. Beyond details like years and $'s, the only real question is how Cliff and CC stack up as a rotation # 1 and 1A.

  7. New York State's top tax rate in 2010 is 8.97%. Even assuming that Lee optimizes his tax situation by moving to Texas, the difference per year in tax just under $1 million per year (assume USD 25M salary 60% earned in NY State and that 80% of the NY State tax is deductible in the Itemized Deduction on Federal Taxes with a top rate marginal rate 35%). Add in that the cost of living differential of $1 million per year is allot and the difference between a Ranger salary and a Yankee offer is just not that much. On top of everything else, if NY State were to go back to the 6.85% top rate or the top Federal rate goes up to 39.6% the difference in after tax income would shrink. In the end, the difference is probably significantly less than $2 million per year in taxes and cost of living adjustments.

  8. I totally agree with you but how can I get the exact information about Alabama state tax brackets for 2010 taxes. I think e filing is the best method for state and federal tax filing.

  9. WTF? I was following an intelligent conversation about baseball and taxes and a spam message broke out…

    As a transplanted NYer and current Texas resident, I can verify the "high" Texas real estate taxes and 8.25% sales tax as the alternative to a state income tax. ("High" is relative, as a transplant fr California or Massachusetts would be thrilled.) They're really hoping around here that Lee re-signs with the Rangers, but I have my fingers crossed. In this, I am a pilgrim in an unholy land.