When it comes to professional sports athletes and their contracts, we continue to see astronomical multi-year deals happen year after year. These contracts continue to be the richest and most lucrative deals of the time, only to be outdone by the next round of contract extensions and free agency signings. It’s as if teams and owners are continuing to try covering the spread of having the highest paid athlete superstars.
But many fans and onlookers forget to take things into serious consideration when they see the flashy, multi-million dollar contracts that these athletes sign. Location of the team they are signing or playing with plays a huge impact on their contract and its worth to them overall. It is more than just the dollar figures in the contract. The location has more to do with the state’s taxes and how much money the player will take home along with the price of living in that state or city where the team is located.
So let’s take a closer look at things that are considered in the price of contract before you start calling them greedy.
Outside of federal income taxes, which most professional athletes fall into the highest tax bracket of 37%, most fail to think about the state income taxes that professional athletes have to pay in various ways. Let’s use some of the higher baseball contracts as an example due to their extreme travel schedule and their high prices. Specifically, let’s look at the $300 million contract that Manny Machado signed in 2019.
So over the course of the 10 year contract, just in federal income tax, Machado will pay $111 million over the 10 years! But the state tax implications on that same contract will also play a role. Because Machado signed a deal with the San Diego Padres, a California based team that carries a 13% state income tax rate. That is another almost $40 million dollars in state taxes just to California alone. So just in income taxes alone, he will pay over half of his contract to taxes.
This also doesn’t account for the state income taxes that players are required to pay in any state that they play in during the season. Now each state has different tax codes and laws for these type of circumstances, so they vary state to state.
Had Machado signed with a Texas based team, where state income tax is 0%, his $300 million dollar contract would be worth a lot more. But teams in states such as these can afford to pay lower salaries because the player will keep more of their money due to the lower state income tax rate.
The location of the state or city that the player will play in can also play a role in the cost of living, especially if that player is going to be there for a long term contract and decide to take up that spot as their main residency. Going back to Manny Machado’s contract and playing and living in California, this will continue to take a good chunk of change out of his contract to live a majority of the year. California has one of the highest costs of living in the United States.
This might not seem like a big issue to most people when they look at a multi-million dollar athlete that makes $30 million a year. But when the cost of living and their lifestyle is taken into account, they are getting paid to take care of their bodies and their lifestyles so they can focus on playing their best when the time comes. Money isn’t just about talent, but also how to keep that talent on the field.
If we compare Machado’s contract to the likes of Bryce Harper’s contract who also signed in 2019 with the Philadelphia Phillies, The cost of living and income tax in Pennsylvania is much different. The cost of living is 50 points lower than California and the state income tax is just over 3%. For a $330 million contract, Harper will only pay $132 million in total taxes instead of the $151 million that Machado will pay.
Who do you think made out better on those massive contracts?
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