Death, Taxes — and Pujols

When he accepted a 10-year, $254 million offer from the Los Angeles Angels of Anaheim last week, free-agent first baseman Albert Pujols ended a tremendous chapter in his baseball career. He also joined a team in California — the state with the highest tax rate in Major League Baseball for those who earn as much as Pujols.

Various sources have noted that Pujols’ decision to sign with the Angels, over the St. Louis Cardinals, could see him forgo millions more dollars to income taxes. Certainly, his leaving Missouri — where the highest marginal tax rate is 6%, plus the 1% local rate in St. Louis — now puts Pujols in a state where the highest tax rate is 10.3%.

But athlete taxation isn’t anywhere near as cut-and-dried as it might seem. Most definitely, it’s not simply comparing rates between states or multiplying a player’s salary by the highest rate. That’s not how it works. As we discussed earlier this offseason, the ‘Jock Tax’ is fairly convoluted and it’s far more intensive.

For simplicity’s sake, understand that Pujols’ contractual windfall won’t entirely be taxed on California’s 10.3% because he doesn’t spend the entire season in the state. The 10.3% only applies to the number of “duty days” he spends in California. The rest of his salary is prorated based on time he spends in each city and in each state, which is where we get the “Jock Tax” moniker.

To get an idea of what Pujols will really have to pay, the schedule is the Holy Grail, and it’s helpful in this case because it’s unbalanced. For Pujols, his effective rate in an Angels jersey this year is 7.2%. That’s a real percentage derived from the actual 2012 schedule (including spring training), matched with applicable rates in each jurisdiction and the number of duty days spent, not games played, which makes a big difference here.

If you want to understand why tax rates among teams don’t lend themselves to a simple apples-to-apples comparisons, consider the Los Angeles Dodgers. The team is only roughly 30 miles from the Angels, yet — had Pujols signed the same $254 million contract there — his 2012 tax rate would have been 7.7%. That’s 50 basis points more based on nothing but the schedule.

But why the difference? It’s pretty simple, when you think about it. Pujols will get the benefit of multiple non-tax states because he’ll play the Mariners (Washington state) and the Rangers (Texas) on the road. And it’ll get even better in the near-future when the Astros join the American League West in 2013.

During that year, the AL West will have three teams in non-tax states. (And the loss of the Astros from the National League Central — where the St. Louis Cardinals play — will mean a pretty notable swing there, too.) For our Dodgers exercise, the tax man cometh and cometh and cometh: Not only do the Dodgers play home games in California, but they see 18 more road games in the state — against San Diego and San Francisco. The Dodgers, Giants and Padres spend just about 50 percent of their duty days in California, making it the worst division in terms of taxation on players in the highest marginal bracket.

For major-league players, there’s another consideration: Spring Training. There are 220 duty days in a major-league season, which includes spring games. Having Spring Training in income-tax-free Florida (Cardinals) is far more favorable than having 20% of your duty days coming in Arizona’s Cactus League, where the Angels play. While Arizona is on the lower end of state taxes — highest marginal rate of 4.54%, which is the eighth lowest marginal max in MLB — anything compared to 0% is substantial. Including the time in California, that’s another place where Pujols’ pocketbook will take a hit.

Pujols’ contract is interesting because he makes enough money to fall into the highest marginal tax bracket virtually everywhere he travels — and he’s changing spring venues. On the flip side, though, he’ll now travel to tax-free Florida (Rays), Texas and Washington for 23 regular-season games this year, and an even higher tally when the Astros join the American League.

For next year, at least, the Cardinals get the benefit of playing in Houston for nine games. But St. Louis isn’t in a division with as many tax-free states as AL West teams. Plus, the Cardinals play 22 road games against the Reds, Brewers and Dodgers, all of which have high marginal rates for folks who make the kind of cash that Pujols will earn; Ohio doesn’t have a tremendously high state rate, but Cincinnati has a material local income tax.

So what does this boil down to for Pujols? The 2012 effective rate for him next season will be 7.2%, compared to the 5.2% effective rate he would have had with the Cardinals. That’s a clear difference, but that gap is far less significant than the 3.3% that initially seemed to prevail (10.3% for California and 7% for Missouri/St. Louis). When discussing those rates relative to a $25,000,000 salary, we’re talking about a $500,000 difference.

The difference in effective tax rates yields Pujols a St. Louis tax-savings in excess of the league’s minimum salary — but we’re not talking about millions upon millions of dollars each season, as if all his earnings were taxed at 10.3%. And those figures are going to swing even more when the Astros join the AL West in 2013. Without knowing the schedule for that season, it’s safe to say that Pujols’ effective rate will likely be around 6.9% — while his rate with the Cardinals would have increased to 5.3%.

The AL West features high rates from the Angels and Athletics, but the division will also offer significant offsets with the Rangers, Mariners and Astros. And that goes a long way toward Pujols mitigating the monstrous tax differences between California and Missouri, for someone whose entire income-base was derived in either state. The potential increase in California’s highest marginal rate to 11.3% would change things, but the fact remains that he isn’t being taxed at those high California rates for all $25 million of his salary.

So while St. Louis is, and will remain, more favorable to California when it comes to taxes, the current and future differences — barring extreme rate changes in states and cities across the league — render the destinations more comparable than they initially would seem. And all that could perhaps could make the AL West a much more attractive division for players. That is, if those guys talk to their accountants.