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  • Did High Taxes Help Phillies Land Cliff Lee?

    Many baseball fans and sports writers woke up yesterday morning scratching their heads to Cliff Lee’s decision to turn down a deal worth $154 million over 7 years with the New York Yankees to join the Philadelphia Phillies for a mere $120 million over 5 years. As ESPN columnist Jayson Stark put it, “Does anyone out there remember anything like this — a player who’d been portrayed as being obsessed with getting every possible dollar out there, who then decided he didn’t really need, like, 30 million of those dollars after all? Unbelievable.”

    Although it’s possible that Mr. Lee was inspired by the season of giving, he is more likely driven by his pocketbook than anything else. You could mention, of course, that the average annual salary associated with the Philadelphia contract comes out to $2 million more per year than what the Yankees were offering, but that still leaves over $30 million on the table in New York. But this isn’t the whole story, as Cliff Lee stands to pay considerably less in taxes by going to Philadelphia rather than New York. Here’s the math:

    The top marginal income tax rate in New York is among the highest in the nation, coming close to 7 percent. In addition, New York City imposes its own income tax on residents that tops out at over 3 percent on incomes over $60,000. On the other hand, Pennsylvania has a flat income tax of just over 3 percent, while Philadelphia assesses no special income tax on its residents. These differences are meaningful for most taxpayers, but are especially so for someone who stands to make as much as Cliff Lee.

    In an average year playing for the Phillies, Cliff Lee will make $24 million and pay about $8.8 million in federal income and payroll taxes, as well as about $737,000 in state taxes. That comes out to about $14.4 million per year in after tax income or $71.9 million over 5 years. If Lee had gone to New York, he would have made $22 million and paid about $7.6 million in federal income and payroll taxes, about $1.5 million in state taxes, and just over $800,000 in New York City taxes (if living in the city). That translates into $12.0 million in after tax income per year, $60.2 million over 5 years, and $84.3 over 7 years.*

    What this means is that the difference between the Phillies and Yankees contracts isn’t $34 million, but is rather $12.4 million or $6.2 million per year for what would have been years 6 and 7 under the Yankees contract. Therefore, Lee may be betting that when his contract expires after 5 years with the Phillies, he may be able to secure another contract worth at least this much in after tax income (perhaps back in Texas, where there’s no state income tax?).

    Of course, this is only speculation. However, it’s important to realize that individuals regularly make decisions about where and how much to work based on their potential income after taxes are taken out. This is especially true for the most talented, productive and highly paid, as the cost associated with one choice over another is likely to be greater.

    *Federal and state income and FICA taxes were estimated using the National Bureau of Economic Research’s TAXSIM program. New York City taxes were estimated by the author without the help of a tax model. The federal income tax calculations assume a top marginal rate of 35 percent. If the top marginal rate is allowed to increase next year, this will change the estimates a bit. These estimates also assume that Cliff Lee files as an individual and pays all the taxes on his salary as a resident of either Pennsylvania or New York.

    Posted in Economics [slideshow_deploy]

    5 Responses to Did High Taxes Help Phillies Land Cliff Lee?

    1. Stan Olshefski says:

      The analysis is pretty much correct, except athletes and performers frequently are forced to pay state and/or city taxes while on the road.

      It doesn't completely change point of the post, but it does effect exactly how much state and city taxes that Cliff Lee will have to pay.

    2. city tax says:

      There is an Income tax in Philadelphia. According to the current rates he will pay about about $940,000 or $840,000 per year depending on if he lives in the city or not. So his after tax income in Philly will be somewhere between 67 and 68 million USD.

      Plus you'll probably a lot more on cheesesteaks in Philly.

      City of Philadelphia Resident Tax 3.9296%

      City of Philadelphia Non-Resident Tax 3.4997%

    3. Pingback: Tweets that mention Did High Taxes Help Phillies Land Cliff Lee? | The Foundry: Conservative Policy News. -- Topsy.com

    4. mike davis, dallas, says:

      Good blog but just to refine the numbers a bit. NY state actually increased the marginal tax rate to 8.97% on incomes over $500 k. Combine that with the city tax of 3.648% and you get a marginal rate is 12.91%. Philadelphia does have a city tax on non residents of about 3.5%. (All of these numbers came from the various government web sites or the Tax Policy Foundation. If I'm missing something, please correct.) But still the difference is over 6%–about $7.2 million on Lee's contract!

      The really critical distinction for most people, thought, is that Penn. has a flat tax rate–no punishing earnings.

      To shamelessly self-promote, I have an op ed coming out in tomorrow's Investor's Business Daily where I talk about this and also give some interesting numbers about the out-migration from New York.

    5. Brian H. says:

      If it was REALLY about paying less tax Cliff Lee could have stayed in Texas (with a team who just went to the World Series with) for $138 million over six years with a seventh-year vesting option worth $23 million and pay NO TAX because Texas has no state income tax AT ALL. So the tax theory doesn't hold water.

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