Taxes matter, especially to high-paid professional athletes. A simple move across state lines can save an athlete millions of dollars in taxes. And with the short shelf-life of many athletes, who can blame them? The latest story the clash between athletes and state taxes comes to us via a story in Sports Illustrated titled "State taxes may compel Johnny Manziel to avoid Ohio residency." The story finds:
"Johnny Manziel may be a Cleveland Brown, but don't expect him to become an Ohioan. Manziel, a Texas resident, was selected 22nd overall in the NFL draft. He is slotted to earn $4,738,000 this year. As a Brown, a portion of Manziel's NFL income will be subject to Ohio's 5.392 percent income tax plus local income taxes."
"Assuming he remains a Texas resident, Manziel will pay the Buckeye State and local authorities approximately $278,000 this year. Had he been drafted instead by the Texans, Cowboys, Jaguars, Dolphins, Buccaneers or Titans, Manziel would have mostly avoided state income taxes, as those teams play in states without income taxes. All NFL players pay federal income taxes and so-called "jock taxes," which are state and municipal taxes levied on athletes for playing games in different venues."
The tax difference between Texas and Ohio is very large. As shown in the chart below, Ohio's state and local individual income tax burden is 3.03 percent versus Texas's burden of 0 percent. This means that, on average, every $1 million in income results in a Ohio income tax bill of $30,300. Again, from the athlete's perspective, it's not just the tax bill itself but also the lost opportunity costs to them. In essence, athlete's need to treat their income like a windfall and invest it for the future--$30,300 can be worth hundreds of thousands over their lifetime.
It is important to note that I am looking at the state AND local individual income tax burden because Ohio has perhaps the worst local individual income tax system in the country. The local income tax increases the total income tax burden by 50 percent. For more information, see my recent in-depth blog: "Time to Reform Ohio's Municipal Income Tax System."
Additionally, the Sports Illustrated story mentions the problem of "Jock Taxes." The problem for these athletes is that since they travel in order to perform their services, there is a question as to where they work and, therefore, pays taxes. If the athlete works for the Tampa Bay Buccaneers, their employer is in income tax-free Florida. Yet, thanks to jock taxes, the athlete will pay income taxes in the states they play in. The states with the jock tax, of course, argue that they are really "working" in their state.
This may seem logical at first, but it begins to raise some very thorny questions--aren't traveling salespeople or business executives also working when they travel? States don't go after these types of taxpayers because it cost prohibitive to do so relative to the revenue raised. However, this creates an arbitrary tax system where as long as it benefits the state to tax you they will. The Tax Foundation has an excellent study that really dives into the problems posed by Jock Tax: "Nonresident State and Local Income Taxes in the United States: The Continuing Spread of 'Jock Taxes'" (pdf)
Overall, we shouldn't begrudge these tax-minimizing athletes who are just sitting ducks to states looking for an easy revenue source, especially one that won't vote against them during the next election. Keep in mind that the average athlete is not "living large," yet they (along with coaches and trainers) are caught up in the state snare set for the superstars--and we all need to wary of one day becoming bycatch as well.
J. Scott Moody has over 18 years as a public policy economist with a specialty in tax policy and has over 180 publications. He has worked for numerous national and state-based think tanks such as Federalism In Action, Tax Foundation, Heritage Foundation, and The Maine Heritage Policy Center.