Play Ball! – Back to Biz Monday

The 2013 baseball season is barely a month old, and fans are already bickering over the first twists and turns. That’s because rabid fans are never content to just watcha game. They have to discuss it — among friends, at the local tavern, and on talk radio. If a pop fly drops for a single behind Cubs center fielder David DeJesus, and no one is there to argue he should have caught it, does it really make any noise?

Statisticians have always delighted in analyzing baseball — some would say, analyzing it to death. So-called “sabermetricians” (followers of the Society of American Baseball Research, or SABR) pore over arcane stats like “batting average on balls in play” (a measure of how many balls in play against a pitcher go for hits, excluding home runs, used to spot fluky seasons) or “value over replacement player” (a measure of how much a player contributes to their team in comparison to a fictitious replacement player who is an average fielder at his position but below-average hitter).

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Now there’s a whole new category of relevant statistics for fans to debate. The Journal of Sports Managementhas just accepted a paper from Fordham University business professor Stanley Veliotis, titled Salary Equalization for Baseball Free Agents Confronting Different State Tax Regimes. And this one will blow the lid right off Moneyball! Here’s the abstract:

“This paper derives equivalent gross salary for Major League Baseball free agents weighing offers from teams based in states with different income tax rates. After discussing tax law applicable to professional sports teams’ players, including ‘jock taxes’ and the interrelationship of state and federal taxes, this paper builds several models to determine equivalent salary. A base-case derivation, oversimplified by ignoring non-salary income and Medicare tax, demonstrates that salary adjustment from a more tax expensive state’s team requires solely a state (but not federal) tax gross-up. Subsequent derivations, introducing non-salary income and Medicare tax, demonstrate full Medicare but small federal tax gross-ups are also required. This paper applies the model to equalize salary offers from two teams in different states in a highly stylized example approximating the 2010 free agency of pitcher Cliff Lee. Aspects of the models may also be used to inform other sports’ players of their after-tax income if salary caps limit the ability to receive adequately grossed-up salaries.”

Aren’t you glad you’ve got us to make sense of this stuff? (And this is baseball — it’s supposed to be fun.)

Taxes have always dogged professional athletes. What basketball fan hasn’t wondered what role Florida’s sunny tax-free climate played in luring superstar LeBron James to the Miami Heat? And really, who can blame golfing great Phil Mickelson for threatening to abandon California to escape a 63% tax rate?

But just imagine the debates this paper will inspire! How will interleague play affect equivalent gross salaries for NL East teams playing even more games in tax-heavy New York? Does A-Rod really come out ahead by sticking with the Yankees? Will fists fly when Canadians realize none of this has any meaning for the lowly Toronto Blue Jays?

You may think the tax code is harder to understand than the infield fly rule. (You may even be right.) But there’s one very important difference between baseball and taxes. Stats geeks can use measures like the “player empirical comparison and test algorithm” to guess how players might perform for the rest of the season. But proactive tax planners like us can use proven strategies like the medical expense reimbursement plan, S-corporation, or home office deduction to guarantee less tax. So call us when you’re ready to measure some savings that count!

~Larry Stone

Larry D. Stone,  Stone CPA

970.668.0772,    970.668.0434,

larry@stone-cpa.com – Colorado Tax Coach

Author of “The Secrets of a Tax Free Life”

To read Larry Stone’s previous post click here

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