After signing a 12-year, $365 million contract extension with the Los Angeles Dodgers last Wednesday, Mookie Betts ensured his place among the wealthiest Americans, but just how rich he’ll be depends very much on where the 2018 American League MVP decides to reside. Differences in state tax laws could mean the difference of tens of millions of dollars to the government.
Betts will pay federal, state and payroll taxes—along with the so-called jock tax, whereby states (and/or sometimes cities) tax visiting teams’ players for games played in their jurisdictions. Whether Betts lives in his native Tennessee or relocates to sunny California, he’ll pay the highest federal income tax rate (37%) on the portion of his income that exceeds $518,401 (or, if married filing jointly, income that exceeds $622,051.)
He will also pay state taxes to California based on his wages in the state. California, which imposes a 13.3% tax on those who earn more than $1 million a year, has the highest state tax rate in the U.S.
But where Betts can greatly influence his tax bill is through his residency. According to The Los Angeles Times, the Nashville-born outfielder reportedly still lives in Tennessee. Assuming he preserves his residency in Tennessee (which requires proof of a residence address and other documentation) over the next dozen years, Betts could save millions given that the Volunteer State is one of nine states without income tax on wages (it does tax income earned from interest and dividends).
According to our calculations and the available data, Betts, as a Tennessee resident, would pay approximately $158.5 million in combined taxes over the life of his contract. This reflects the fact that he would not pay state taxes on his $65 million signing bonus because he lives in Tennessee. The Associated Press reports that $115 million of Betts’s deal is deferred beyond the years of his contract, meaning he will continue earning Dodgers paychecks even after 2032. In our analysis we are assuming that Betts remains a resident of the state during his playing years and his deferred years.
Betts as a Tennessee resident
Federal: $135.0 million
California $19.8 million (includes projected jock taxes)
Payroll: $3.7 million
That’s a ton of money in taxes, to be sure. However, it is still nearly $34 million less than he would pay as a California resident. The Golden State bill would amount to $53.5 million, more than 2.5 times the $19.8 million he would pay to California as a Tennessee resident.
Betts as a California resident
Federal: $135.0 million
California $53.5 million (includes projected jock taxes)
Payroll: $3.7 million
While unlikely, Betts could also claim residence in the place where he became famous: Massachusetts. According to The Register Citizen, Betts rented a mansion in a Boston suburb while he played for the Sox from 2014 to ’19. Massachusetts imposes a 5.05% income tax. Betts would pay then, after expected credits for taxes paid to other states, approximately $6 million more if he resided in Massachusetts over Tennessee.
Betts as a Massachusetts resident
Federal: $135.0 million
Massachusetts: $6.0 million (reflects expected credits for taxes paid to other states)
California: $19.8 million (includes projected jock taxes)
Payroll tax: $3.7 million
The residency situation facing Betts is not unique. As Barry Bloom recently detailed nearby, the Toronto Blue Jays playing their 2019 season home games in the U.S. will provide players a windfall due to differences in tax rates between the U.S. and Canada. However, for Betts, keeping his residence in his home state would be most financially sound.
Robert Raiola is the Director of the Sports & Entertainment Group of the CPA and Advisory Firm PKF O’Connor Davies.
