On April 15th, Pro Athletes Face Their Fiercest Adversary: the Taxman
Tax Day hits professional athletes harder than a Larry Robinson body check into the boards.
Max Baer and Primo Carnera couldn't knock Joe Louis down. But the IRS did--repeatedly. Joe Louis, a competitor not quite habituated to getting up off his back from the canvass, took a job as a casino greeter, reentered the boxing ring as a referee, and even went on game shows as a result of IRS hounding. What else, but the obscenity of the income-tax bureaucracy, explains the obscenity of the greatest heavyweight champion in boxing history participating in professional wrestling?
Athletes have learned from cautionary tales like Joe Louis. Even the biggest athlete in the world makes a weak match against Big Government. So, competitors increasingly take taxes into consideration before they sign contracts.
When Robinson Cano switched jerseys from Yankees to Mariners this offseason after nine seasons in New York, income taxes couldn’t help but play a role in his decision. The second baseman paid a 9 percent state income tax living in New Jersey. In Washington, he doesn’t pay a dime. So, despite winning a World Series and laying down roots in the tri-state area, Cano signed a ten-year deal with the Seattle Mariners. Surely Seattle offering more money for more years pushed Cano to sign. But the tax incentive didn’t hurt Seattle in negotiations.
Manny Pacquiao, who defeated Timothy Bradley in a rematch on Saturday night, returned to Las Vegas after fighting in China to defeat both Brandon Rios and Uncle Sam. A Communist nation would seem a strange tax haven. But Pac Man, who has endured problems with the IRS, saved millions fighting in Macau rather than Vegas despite the fact that Nevada lacks a state income tax. Tellingly, since his 2005 technical knockout of Hector Velazquez at the Staples Center in Los Angeles, Pacquiao has fought all sixteen of his U.S. fights in either Texas or Nevada, states that decline to impose income taxes. But even the absence of a state income tax proved a weak counterincentive to fight in Vegas when the surrounding nation grabs four of every ten dollars in income. In Macau, which, like Hong Kong, operates as a special zone free from much of Chinese law, Manny faced just a 12.5 percent income tax. Pacquiao’s financial advisor Michael Koncz explained last year that “the 39.6 percent tax rate Pacquiao would face if he were to fight again in the U.S. makes a fall bout in Las Vegas ‘a no go.’”
LeBron James paid a six percent income tax to Ohio when he played for the Cleveland Cavaliers. He pays no home state income tax playing for the Miami Heat. King James actually spurned a more lucrative contract with the Knicks to play for the Heat. New York boasts one of the most onerous income taxes in the nation at nine percent. Florida boasts no income tax at all. Since a huge chunk of that larger Knicks contract would have gone to the taxman LeBron would have actually generated lower income with the higher contract. Just because LeBron didn’t go to college doesn’t mean he doesn’t understand basic math. Signing with the Miami Heat didn’t just mean more rings. It meant more cash—even if the contract said otherwise.
The taxman tries to stay one step ahead of savvy players. States aggressively enforce “jock taxes,” which bill visiting players for the days they perform within their jurisdictions. “Our accountant handles all of that, but my poor wife ends up signing everything, and it takes her forever,” Red Sox second baseman Dustin Pedroia told the Boston Globe. “In some states, like if we play in California four times in a certain season, it gets pretty complicated, from what I understand.”
The IRS even assigns agents to go after celebrity athletes. “The Internal Revenue Service (IRS) has an Issue Management Team focused on improving U.S. income reporting and tax payment compliance by foreign athletes and entertainers who work in the United States,” the agency’s website reports. “It is important to ensure proper tax reporting and payment by these individuals and those associated with arranging their appearances in the U.S. and managing their financial affairs.”
Professional athletes are one-man corporations. And like traditional companies, they relocate to the most attractive economic climates. Teams based in California and New York have to offer more, because their state governments leave athletes with less, to attract marquee players than teams based in Florida and Texas.
Tax Day wreaks havoc on individual players. So, it necessarily wreaks havoc on general managers trying to field competitive rosters in less-than-competitive states. In a show-me-the-money age, athletes, like IRS bureaucrats, seek the maximum.