FG on Fox: Johnny Cueto’s Calculated Gamble
On Monday, the San Francisco Giants reportedly agreed to terms with free agent starter Johnny Cueto on a six-year contract that will guarantee him $130 million, a pretty nice haul for a pitcher who struggled significantly in the second half of the year. And when you factor in that Cueto also obtained an opt-out after the second year, which could allow him to re-enter the market after the 2017 season and land a significant raise if he pitches well over his next 400 innings, this deal offers a lot of reasons for Cueto and his representatives to be happy with how the market has developed.
However, it’s interesting to see Cueto sign with the Giants for $130 million, when just a few weeks prior, his agent had publicly stated that a reported six year, $120 million offer from the Diamondbacks was a “low offer for the market”. In fact, his agent made it sound like they were going to be aiming quite a bit higher.
“It was a low offer for the market,” Dixon said. “We didn’t have to think hard to reject that offer. Arizona wanted to do something fast, but we didn’t want to take something below market value for a No. 1 starter, and with the recent events, I think that time gave us the reason.”
Agents are known for public comments that may not be reflective of reality, since their job is to get as much money for their clients as possible, not be objective sources of information. But in light of Dixon’s comments, it’s worth noting that Cueto actually took a smaller guaranteed income by accepting the Giants’ offer than he would have received if he had taken the Diamondbacks’ offer, due to the very different tax climates in California and Arizona.
For high-earners like Cueto, California has the highest marginal tax rate of any state in the country, coming in at 13.3% of all income over $1 million. Meanwhile, Arizona has one of the lowest tax rates in the country, with their highest marginal rate topping out at 4.5%. Of course, the tax code is complex, and it’s never just as simple as looking at the top marginal rate to figure out equivalent offers between teams in different states.
Dave is the Managing Editor of FanGraphs.
According to the linked article:
http://www.sloansportsconference.com/wp-content/uploads/2015/02/SSAC15-RP-Poster-Paper-MLB-Jock-Tax-Index.pdf
Mets players pay more taxes than Yankees. Anyone have a guess as to why?
That’s almost certainly based on the location of other teams that they play.
As the paper summarizes, the calculating the tax due is a complicated mix of both the tax rate of a player’s home state (and assumes that he’s a resident of that state), the number of “duty days” that he spends in other jurisdictions, and potential credits for the out-of-state taxes for home state taxes.
While the home state tax situation should be the same for both the Yankees and Mets, they obviously play different road schedules.
Is this a result of the cities they travel to? Aren’t players partly taxed based on other states’ tax laws?
It is interesting that it’s technically less money after taxes, but we’re talking about a difference of roughly one percent a year. And it’s probably worth it. Over the lifetime of the contract, according to the formula in the second half of the article, he keeps $66.24 million after taxes if he signs the D-backs deal and he keeps 65.39 million after taxes after the Giants deal is up (assuming he doesn’t opt out). That’s $850,000 over the span of the deal, or $141,666.67 per year on average. That’s real money for most of us, but for Cueto it’s undoubtedly worth the gamble on the opt-out clause. Not to mention San Francisco is way nicer than Phoenix (yes, it’s a subjective judgement).
The example chart on the second page of the paper linked in Dave’s post doesn’t make sense.
It shows away “duty days” (roughly road games) for the Diamondbacks in 2014 by state. California isn’t listed. The Diamondbacks obviously play a lot of road games in California because the Giants, Dodgers, and Padres are all in the same division.
It’s possible that the tax calculation is correct and that the example chart is off. If that chart is actually how Pogroszewski did the calculation, however, then his calculation for the Diamondbacks appears to be wrong, Specifically, his tax number for a Diamondback would be meaningfully low, because California is a high tax state and the Diamondbacks play a lot of games there.
Interesting take by Dave, but there’s enough wiggle room in some of these assumptions that I wouldn’t assume he’s making less after-tax in San Francisco.
In particular, those jock tax numbers assume that the player is a resident of the state of their home team. I understand making that assumption – you’ve got to make some assumption to come up with this comparison.
The key, though, is that a California resident pays CA state income tax on ALL income (less available credits for out-of-state taxes) while a non-resident pays CA income tax only on income earned in CA (i.e., games played in California).
In some states, being a non-resident can be as simple as making sure not to spend 183 days in the state and having a home in another state. That seems possible for a baseball player who lives elsewhere in the off-season, because he’s also gone roughly half the season. California has some stricter factors than that, but some of the factors seem to me (as a layman) like a baseball player with a home out of state could possibly qualify: amount of time in California vs. out-of-state, location of principal residence, state that issued driver’s license, location of spouse and children, and being in California only for “temporary or transitory purposes”.
All of that said, I agree with the conclusion that the opt-out and front-loading of the contract (vs. probably deferral in Arizona’s offer) were the biggest differences in San Francisco’s offer vs. Arizona’s.