They don’t call it “Taxachusetts” for nothing.
Courtesy of a tax hike narrowly passed by voters on Election Day, many Boston athletes will lose more of their earnings to the Massachusetts Department of Revenue beginning on Jan. 1, 2023. Boston teams could capitalize on the six-week window between now and the New Year to entice players to join a squad or extend a deal with signing bonuses taxed at the lower rate.
Massachusetts voters approved Ballot Question 1 by a count of 52% to 48%. It amends the state’s constitution to raise the marginal tax rate on those whose annual taxable income exceeds $1 million by 80%, from 5% to 9%. The new tax rate is among the highest in the country, trailing only a handful of states. The increase applies not only to salary and wages but also to one-time earnings, such as the sale of homes or investments or proceeds from inheritances.
Advocates say so-called “millionaires” ought to pay more and stress the additional revenue will be spent on transportation and public education. Critics warn the new tax considers a wide scope of residents, including those whose wealth is tied largely to their homes rather than to salary, as millionaires, and that the tax will motivate residents and businesses to move out of state.
According to data from Spotrac, the Patriots, Celtics, Red Sox and Bruins employ more than 80 players who earn more than $1 million in salary. Celtics star Jayson Tatum, who reportedly resides in a multi-million-dollar home in Newton, Mass., is the city’s highest paid athlete, earning $30,351,780 in the 2022-23 season. He projects to pay the most under the new tax.
Consider Tatum’s $32,600,060 salary for the 2023-24 season. As is currently the case, Tatum will pay a 5% tax on the first $1 million. But under the new tax scheme, he’ll then pay a 9% tax on the remaining $31,600,060. That raises his tax burden from $1,630,003 under the current tax scheme to $2,894,005 under the new tax scheme—an additional $1,264,002 in taxes.
In the real world this calculation would be adjusted for Tatum’s federal income taxes, his taxes to other states or municipalities (including via jock taxes), his endorsement money, interest from banking, the sale of any investments or homes, deductions and other variables. But it’s a safe bet to project that Tatum will pay an additional amount that exceeds $1 million. And his tax bill will only climb as his salary climbs: $34,848,340 in 2024-25 and a player option for $37,096,620 in 2025-26.
The Red Sox could adjust their strategies when it comes to player salaries. The team, which is currently pursuing free agents, could offer more “post-tax” money to free agents if more of the amount were tied to a signing bonus paid by Dec. 31, 2022.
Signing bonuses are sometimes used to lure marquee MLB free agents. Last week, for example, the Mets re-signed all-star reliever Edwin Diaz to a five-year, $102 million contract that includes a $12 million signing bonus. A year ago, the Mets signed Francisco Lindor to a 10-year, $341 million deal with a $21 million signing bonus. When the Dodgers signed former Red Sox outfielder Mookie Betts to a 12-year, $365 million contract, $65 million came in the form of a signing bonus. The Dodgers also negotiated a $23 million signing bonus for Clayton Kershaw in his new three-year, $93 million deal.
The Sox have been linked to a number of free agents, including shortstop Xander Bogaerts, who recently starred for the team and reportedly seeks a deal in excess of $200 million. The team could effectively offer Bogaerts more money (post-tax) if he takes a signing bonus.