It's official. New York Yankee Robinson Cano will soon switch coasts as a result of the contract that he signed with the Seattle Mariners. Both teams wanted the five-time All-Star second baseman, and both made nice offers. The Yankees offered a seven-year contract for $175 million, or $25 million annually. Seattle's offer was $240 million for ten years, or $24 million annually. Several factors need to be taken into account in determining the better deal, the length of the contract, pay per year, agent fees, and a key factor that is often overlooked – state income taxes.
Robert A. Raiola, CPA, ran the numbers on the two deals. As head of the Sports and Entertainment Group at Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC, a Cranford, New Jersey–based accounting firm, Raiola always looks beyond the gross numbers and focuses on the net amount. "The difference between the face value of the offers and the amount an athlete can actually take to the bank can be staggering. When you sift through the tax details, the results may surprise you", he said.
Apples and Oranges
Cano is currently a New Jersey resident, where the top tax rate is 8.97 percent. If he remained a Yankee, about 45 percent of his income would also be taxed at New York rates, since the team is based in New York. Over the life of his contract, said Raiola, he would pay $2.2 million a year, just in state income tax. This includes tax to his home state of New Jersey, plus tax paid to states where he played that charge state income tax (commonly called "jock tax"; see sidebar). The $2.2 million is net of the credit that Cano would receive on his New Jersey resident return for taxes paid to other states.
As a Mariner, the tax picture would be vastly different. Washington State has no personal income tax. Assuming Cano becomes a resident of Washington – and he has said he will – he would only incur state taxes when he played in states which do have an income tax. Seattle is in the Western Division of the American League, which includes some teams in states that also do not charge personal income tax. Texas, for example, has the Rangers and the Astros, so time spent playing in Texas would be state-tax-free.
Overall, Raiola estimates, as a Mariner and Washington resident, 70 percent of Cano's income would avoid state income taxes. Adding together the estimated jock tax incurred while playing in states like California, which do impose a state income tax, Cano would pay about $504,000 each year in state income tax, said Raiola. Compare that to $2.2 million a year as a New York Yankee.
|State Income Tax||504,000||11,177,410|
|Net Pay||$12,822,590||$128,225,900||10 years|
|State Income Tax||2,225,368||12,672,116|
|Net Pay||$12,327,884||$86,295,188||7 years|
Just comparing the two contracts, the Yankees offered $25 million gross per year while the Mariners offered $24 million gross per year. Taking into account agent fees and income taxes, the New York offer is $12.3 million net per year while Seattle is $12.8 million net per year. At first blush, it looked like New York was offering more per year, but actually Seattle is offering the larger-per-year amount when other factors are taken into consideration.
Looking at the full terms of both contracts, as a Yankee, Cano would net about $86 million, and as a Mariner he would net $128 million, a difference of $42 million.
Also as a Mariner, when Cano plays in his new home state of Washington, he will incur zero state taxes. When he travels to New York in April 2014 to play against the Yankees, New York will charge him approximately $38,000 in state taxes. What a difference a state makes.