Would You Take This Betts?

Sportsball fans who already miss NFL action have just weeks to wait until baseball throws out the first pitch on March 26. While the Astros cheating scandal dominates baseball news, teams across the league are furiously shuffling rosters in hopes of coming up with the winning lineup.

100 years ago, the Boston Red Sox sold their best player, a pitcher named Babe Ruth who wanted to bat every day. Owner Harry Frazee had run out of patience for Ruth's drinking, gambling, and womanizing, and Ruth's hitting prowess made him too expensive to keep. The Sox spent the next 86 years regretting that deal. Now they're doing it again, sending outfielder Mookie Betts and pitcher Mike Price to the Dodgers. And it's all to keep their billionaire owner from paying the league's Competitive Balance Tax to keep him.

When you hear the phrase "luxury tax," you might think of politicians stumping against income inequality. Baseball's "luxury tax" fights inequality, too. The goal is to keep big-market teams like the New York Yankees or Los Angeles Dodgers from bidding up salaries to corner the market on talent. (Funny how no one worries about the Mets doing it.) 

The process isn't quite as hard as filling out your 1040 — but it's not far off. Start with the average annual value of each player's contract. If that amount tops a specified maximum ($208 million for 2020), the team pays 20% of the excess. If they top it a second year in a row, they pay 30%. Three or more times and it's 50%. Clubs that go over by more than $20 million pay a 12% surtax. If they go over by more than $40 million, they pay an extra 42.5% the first year and 45% for future years. Violators can also lose draft picks. 

Where does that leave Boston? In 2018 their payroll was highest in the league at $239 million. It bought them 108 regular-season victories and a World Series trophy. It also meant $12 million in tax. For 2019, they were highest again at $243.7 million. That cost them $13 million. Mookie Betts was scheduled to make $27 million this year, his last before free agency. His teammate Price was scheduled to make $32 million.

Now, Boston's owner, John Henry, ranks 33rd on Forbes magazine's list of the richest sports team owners. His net worth stands at $2.7 billion. But he must be feeling the same pinch Frazee did a century ago. Take his Florida mansion, for example. Back in 2018, he listed it for sale at $25 million. Now he's marked it down 40% to $15 million, which would cover a dozen or so games' worth of player salaries. (Property taxes are $138,907/year, and it can't be cheap hiring staff to clean the 19 bathrooms.)

So, sending Betts and Price packing drops the roster down to $190 million and solves the luxury tax problem. Of course, solving that tax problem creates a new one. Betts was arguably the team's best fielder in 50 years. Look up "franchise player" in the dictionary, and . . . well, you know the rest. Price was the team's #3 pitcher; last year he went 7-5 with a 4.37 ERA. (Sadly, that's what you get for $32 million today.) Baseball writers are crying foul, accusing Henry of putting profits over winning. Where will the Sox stand at the All-Star Break? Bang the Astros' trash can if you know!

Baseball may be "just a game," but those are real dollars the Sox are paying in tax. Just goes to show, nobody likes paying more than they have to, and you shouldn't either. That's why you need a Golden Glover like us on your team!

Play Ball

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 watch a 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).

Now there's a whole new category of relevant statistics for fans to debate. The Journal of Sports Management has 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!