Level the Playing Field: Consider State Taxes when Developing Salary Caps in the Major Sports
States and cities tax professional athletes in multiple ways. A traditional method, which applies to athletes and non-athletes alike, is income taxation by the state in which an individual resides. A second method, utilized by twenty states, is to tax athletes when they participate in games other than in the state they reside.  This second method is commonly referred to as the “jock tax.” Since the inception of the jock tax, inequality from state to state has been a prevalent issue. The combination of the jock tax and differences between how states tax its residents may make some cities in the United States and in Canada more attractive than others. “Although a player may have contract offers from different teams for the same dollar amount he will receive drastically different amounts based upon where those teams play and how often the team plays there.”  At the same time, but for a few adjustments that are made to a team’s salary cap, the teams in the major sports are limited to the same payroll as the other teams in the sport. Given the salary cap, teams in hockey, football, baseball, and basketball may find it difficult to compete with teams with more attractive tax situations. To further increase parity in the major sports, changes should be made to salary caps in the major sports based on the different tax situations created by different states.
The salary cap used in the major sports, is a rule that states a team’s payroll cannot exceed a certain level.  As the only competition for an athlete is from the other teams in the league, the salary cap assists to minimize the advantage wealthier or bigger market teams have.  However, a team’s payroll does not take into account the individual taxes previously mentioned.
Philadelphia was the first city to actively collect the jock tax from the income professional athletes earned in the city.  Since Philadelphia announced their intention to actively pursue the collection of taxes on the income earned by professional athletes in April 1992, , many other cities and states have enacted statutes to tax the income earned by nonresident professional athletes.  Although Philadelphia may have been the first to target professional athletes, Philadelphia used a statute that had been in effect since the 1930s. . Philadelphia has used this statute to collect taxes from entertainers, doctors, attorneys, and other professionals.  The practice has spread to the extent that as of 2007, twenty of the twenty-four states that host a major professional sports team impose a jock tax. . It is easy to see why taxing nonresidents might be an attractive option for states as in 1992, California collected $365 million in state taxes from nonresidents alone. 
There is also a lack of consistency between states with regards to how professional athletes are taxed in the state they reside. Nine states do not have an income tax, which include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming.  Where as California’s individual income tax rate for 2008 was 9.3%.  This may not seem like a lot, but when athletes earn salaries in the millions, the amounts states collect and athletes pay adds up. For example, the salary cap for the NBA for the 2007-2008 season was $55.63 million per team.  9.3% of $55.63 million is $5.17 million. While there are other considerations to take into account, this high level calculation shows that two teams in different states, that plan to use all of the salary cap space allotted to them, could have significantly different bargaining powers. Teams in California would have to consider that up to $5.17 million of their salary cap could eventually be paid to the state of California rather than its athletes. A team in Florida, where individuals are not subject to an income tax, would be able to utilize this amount as incentive for athletes to sign with their team, as it would not be used to pay taxes.
III. State Taxes Make Some Teams More Attractive Than Others
Florida has no individual income tax and if an athlete played all of their games in Florida, the athlete would not have to pay an income tax to the state of Florida. However, professional athletes who reside in Florida will still have to pay income taxes if they play in a state with a jock tax. Thus, “[w]hen athletes travel to states that do not impose the jock tax, the only players who can escape without having to pay any income taxes to either the nonresident state or their home state are those who reside in states without a state income tax.”  An athlete who resides in Texas and does not pay an income tax will still have to pay at a high rate when they play in California.  This makes cities like Miami or Houston a much more attractive cities to play, rather than playing in Los Angeles, New York City, whose 2008 tax rate was 6.85% for earnings over $40,000, , or Chicago whose 2008 state tax rate was 3%.  It is not a secret that the free agent class of the NBA for 2010 has many big names who will be seeking large contracts. However, in order to lure a player like Dwyane Wade away from Miami, the Chicago Bulls or another team in the aforementioned higher taxing jurisdictions would have to offer players a higher salary to provide a salary with equivalent after tax value.  Even though teams like the Bulls or Knicks may have an advantage by being located in markets that consistently attract more fans and sponsors, players in these markets will earn less after taxes. Therefore teams will have to offer a player more to give them equivalent value, which utilizes more of the team’s salary cap and will put teams in those higher taxing markets at a significant disadvantage.
Different states have different methods to calculate the jock tax.  Even though states usually grant a tax credit for taxes paid to another jurisdiction, , double taxation is not always eliminated.  The problem is that while the majority of states use the “game-day” approach to calculate the tax owed, what is considered a game day may be different from state to state. Therefore, there is a risk that allocated earnings for one game day or travel day may be allocated to multiple states.  This could lead to that particular income being taxed twice, which is known as double taxation.  Therefore, while this may not create the same magnitude of disparity between the tax situations in two states that the income tax creates, it is a consideration that accountants and lawyers should account for to maximize an athlete’s after tax contract value.
A third difference between states is that a small number of states will not tax certain athletes if they have a less than a certain number of contacts or time spent within a state or earn small enough compensation.  These are called “de minimis visit exceptions” and are utilized in states like Massachusetts, Minnesota, Missouri, and Wisconsin.  This could further differentiate team tax disparities. For example, the Detroit Lions who play two games against the Minnesota Vikings and two games against the Green Bay Packers every season could potentially avoid the jock tax for a quarter of their games, while athletes who play no games in those states would have to pay jock tax on all of their games. Again this is a consideration to maximizing an athlete’s after tax contract value. While two teams may use the same amount of their salary cap room in an offer to an athlete, the athlete will not receive the same after tax value from both teams.
Additional differences arise in the matter in which a state treats another state’s taxes charged to athletes. Illinois only taxes athletes whose state of residence taxes Illinois teams. . Therefore, Illinois taxes those athletes from the nineteen other states that impose a jock tax, but will not levy a jock tax on those athletes in state without a jock tax. Illinois double taxes its own athletes by levying the jock tax on the income the athletes earn within Illinois and also in the nineteen other states that tax Illinois athletes. 
As a diehard sports fan, it may seem odd to make a recommendation that could lead to higher ticket prices for me. However, the major sports should allow teams in cities or states with unfavorable tax environments for athletes, to exceed the salary cap. “[W]hile a league may wish to impose a salary cap on its member teams in order to promote parity, an $80 million cap on gross pay in California will not be the same as an $80 million cap on gross pay in Texas.”  Player agents, lawyers, and accountants will take this into account when negotiating contracts for their clients, but “it can put its teams at a competitive disadvantage when trying to recruit players with a team from a state with no income tax (like Texas or Florida).”  When the salary cap does not equate to the same bargaining power from one state to the next, the efforts of a salary cap to level the playing field on the free agent market, falls short.
No one wants to pay taxes and there are arguments that the jock tax should be eliminated, , however as it is a source of income for many states, this may be a tough battle to win. Until that happens, the major sports should take into account the competitive disadvantage teams in high tax jurisdictions have. To remedy this disadvantage, salary caps should be adjusted.
 John DiMascio, The “Jock Tax”: Fair Play or Unsportsmanlike Conduct, 68 U. Pitt. L. Rev. 953, 954 (2007).
 Kara Fratto, The Taxation of Professional U.S. Athletes in Both the United States and Canada, 14 Sports Law. J. 29, 47 (2007).
 Gerald Prante, Taxes and the Competitions for Star Athletes, Jan. 9, 2006, http://www.taxfoundation.org/blog/show/1291.html.
 Fratto, supra note 2, at 40.
 Leslie A. Ringle, State and Local Taxation of Nonresident Professional Athletes, 2 Sports Law. J. 169 (1995).
 Fratto, supra note 2, at 41.
 Richard E. Green, The Taxing Profession of Major League Baseball: A Comparative Analysis of Non-Resident Taxation, 5 Sports Law. J. 273, 275-276 (1998).
 DiMascio, supra note 1, at 954.
 Green, supra note 8, at 281-282.
 Jennifer K. Davidson, Jock Tax: Occupation Discrimination?, Maryland Bar Journal, May 2004 at 23.
 California Tax Rates and Exemptions, http://www.ftb.ca.gov/forms/2008_California_Tax_Rates_and_Exemptions.shtml (Last visited Nov. 23, 2009).
 NBA Sets Salary Cap for 2007-08 Season, http://www.nba.com/news/salarycap_070710.html (Last visited Nov. 23, 2009).
 Fratto, supra note 2, at 45.
 Davidson, supra note 12, at 24.
 New York State Tax Rate Schedule, http://www.tax.state.ny.us/pdf/2008/inc/nys_tax_rate_150_201.pdf (Last visited Nov. 23, 2009).
 State-wide Fixed Rates, http://tax.illinois.gov/Publications/Sales/SalesTaxRates/FixedRatesIncome.htm (Last visited Nov. 23, 2009).
 Sam Smith, Taxing Dilemma for NBA’s 2010 Free Agents, Jul. 27, 2009, http://www.nba.com/bulls/news/smith_090727.html.
 Elizabeth C. Ekmekjian, The Jock Tax: State and Local Income Taxation of Professional Athletes, 4 Seton Hall J. Sport L. 229, 242 (1994).
 Id. at 241.
 Fratto, supra note 2, at 44.
 Ekmekjian, supra note 20, at 242-243.
 DiMascio, supra note 1, at 962.
 Fratto, supra note 2, at 43.
 Davidson, supra note 12, at 25.
 Prante, supra note 3.
 See DiMascio, supra note 1.