- Could state and local income taxes impact where pending free agent John Tavares goes? Depending on where he signs, he could be looking at notably different take-home pay.
When New York Islanders captain John Tavares becomes an unrestricted free agent on July 1, the 27-year-old center will become the most coveted player on the market. Tavares, the number one pick in the 2009 NHL draft, scored 38 goals in the ‘17–‘18 season and has been named to five NHL All-Star teams over his nine seasons in the league. He is entering his prime years and should continue to excel into his 30s. Tavares is reportedly meeting this week with five teams: the Dallas Stars, Boston Bruins, San Jose Sharks, the Toronto Maple Leafs and the Tampa Bay Lightning. He is also contemplating a return to the Islanders.
Each of the teams Tavares regards as a viable contender for his services has its own advantages and disadvantages, but one potentially influential factor is out of their control: the very different state and local income taxes that impact the amount of money Tavares would net. As explained below, Tavares could “take home” significantly higher or lower pay depending on which team signs him and the applicable income tax rates in the state where that team is based.
As the team that employs Tavares, the Islanders enjoy a built-in advantage in attempting to retain him. Under the collective bargaining agreement, the Islanders can offer Tavares an eight-year contract whereas other teams can only offer him a seven-year deal. The Islanders have attempted to capitalize on this dynamic by reportedly offering an eight-year, $88 million contract to Tavares.
Like other NHL players, Tavares would not receive all of the money his contract calls for. Some of it would go into an escrow account. Pursuant to the CBA, players remitted 11.5% into an escrow account in the 2017–18 season. This is in place as a method of sharing revenue between owners and players, as they share “hockey-related revenue” (HRR). When the league determines the appropriate HRR for each year, players may be refunded a portion of the escrow.
Some of the money would also be directed to federal and state (and, if Tavares signs with a team in Canada, provincial) treasuries. This is through governmental taxation. Here is where it gets interesting for Tavares. He could take-home (after tax) nearly the same amount offered by the Islanders over eight years in a seven-year contract of the same annual value from a team located in a tax-free state. Consider the following chart, which assumes that each team offers Tavares $11 million per year and also offers him the maximum contract length:
*Assumes residence is where team is based
If Tavares accepted the offer from the Islanders, he would take home, approximately, $41.9 million after taxes over eight seasons (5.2 million per year). To be sure, this would be a ton of money and probably more than enough for him and generations of his family. However, he would be leaving money on the table—after-tax table money, that is. Indeed, if Tavares instead signed with the Stars or Lightning, he would net $41.2 million over only seven seasons ($5.9 million per year). This would be true even though all three teams in our hypothetical offer him the identical amount of dollars per year ($11 million) and even though the Islanders can offer Tavares an extra year of guaranteed income.
The reason for this outcome is that if Tavares re-signs with the Islanders, his earnings would be subject to New York State’s 8.82% top income tax rate. This is one of the higher income tax rates in the country. California has the highest tax rate—13.3% on those who earn in excess of $1 million per year. For purposes of this article, we have assumed that Tavares is a New York State resident but not a New York City resident. If he were a New York City resident he would be subject to an additional income tax from New York City.
In contrast, Tavares would avoid state and local income taxes on most of his compensation by signing with either the Stars or the Lightning. This is because neither Texas nor Florida imposes state income taxes, and municipal taxes would not apply, either.
Tavares would not be able to avoid income taxes altogether. If he signs with any team in the U.S., he’d be subject to the highest federal income tax rate (37%), which would cost him approximately $25.5 million over seven years or $29.2 million over eight years. Tavares would also have to pay so-called “jock taxes.” A “jock tax” is a tax imposed by states and municipalities on the proportion of income attributed to athletes on visiting teams when they play games in those states and municipalities. We estimate jock taxes would cost Tavares approximately $1.4 million if he played for a team that is based in a no tax state.
Tavares would also take home more pay per year if he signs with the Bruins than with the Islanders, though not to the same degree as he would gain by signing with either the Stars or Lightning. Massachusetts imposes a 5.1% income tax rate. This means that if Tavares signs a seven-year deal with the Bruins worth $11 million per year, he would net approximately $5.7 million over those seven years—a better deal than has been offered by the Islanders, but not as lucrative as he would net in signing with the Stars or Lightning.
On a more optimistic note for the Islanders, they enjoy a decisive “tax advantage” over two other teams of interest to Tavares: the Sharks and the Leafs. In a seven-year deal with the Sharks, Tavares would be subject to the highest state income tax in the U.S.: California’s 13.3% rate. He would net $4.8 million per year over those seven years. Tavares would take home even less pay per year by signing a seven-year, $11 million deal with the Leafs. While NHL players are paid in U.S. dollars, Tavares would still be subject to income taxes imposed by both Canada and the province of Ontario. Specifically, Tavares would be subject to a combined Canada/Ontario 53.53% tax rate and pay $36.5 million in income taxes over seven years. This translates into earning $4.5 million per year over seven seasons with the Leafs.
Differences in take-home pay take on extra significance in light of the Tax Cuts and Jobs Act, which President Donald Trump signed into law in December 2017. While this federal law cuts federal income tax rates, it also limits the ability of taxpayers who itemize their deductions to deduct the dollars they spend paying state and local taxes from their federal income taxes. Typically those earning high incomes itemize their taxes instead of taking the standard deduction. Under this law, however, there is now a deduction cap of $10,000 for state and local taxes. For persons living in high-tax states like New York and California, the cap is particularly impactful since it increases an itemizing taxpayer’s ultimate bill to the government. Assuming Tavares itemizes his taxes, he has even greater reason to sign with a team that plays in a state with no state income tax or a relatively low state income tax.
When placing the teams together, here is what Tavares would annually “take home” in contracts that offer him an identical amount of money ($11 million per year).
Dallas Stars: $5.9 million
Tampa Bay Lightning: $5.9 million
Boston Bruins: $5.7 million
New York Islanders: $5.2 million
San Jose Sharks: $4.8 million
Toronto Maple Leafs: $4.5 million
In response, you might say “can’t the Leafs and Sharks and Bruins simply offer Tavares more money to offset the income tax differences and therefore make up the take-home pay difference?” The answer is yes in theory, but possibly no in reality.
For one, NHL teams must adhere to a salary cap. The salary cap for the ’18–’19 season is expected to be approximately $79.5 million. The salary cap is not adjusted for different state income tax rates, cost-of-living variances or other geographically based factors that distinguish teams economically. If the Leafs offer Tavares $13 million per year instead of $11 million per year in hopes that it would make up the difference, that extra $2 million could negatively impact the Leafs’ capacity to sign other players.
NHL teams are also subject to a limit on the maximum value of a contract. That maximum value is 20% of the salary cap. With the projected salary cap figure of $79.5 million, the maximum combined annual salary and bonuses in a contract projects as $15.9 million. Only one player in the NHL has signed a “max contract”: Brad Richards, who retired in 2016.
There are many other economic and non-economic factors at play
Determining what Tavares would take home in pay, after taxes, provides only one piece of information that could influence Tavares’s decision. From a financial standpoint, Tavares could also weigh relative cost-of-living. Boston’s cost-of-living, for example, is (per Bankrate.com) 36.5% lower than what Tavares would experience in Manhattan and 16.7% lower than the cost-of-living in Brooklyn. At the same time, Dallas’s cost-of-living is 36.5% lower than what Tavares would experience in Boston and a whopping 53% lower than the cost-of-living reported in the San Jose area. Tavares might also look at the U.S. dollar-Canadian dollar exchange rate and see how his dollar would play in Toronto.
In addition, Tavares could consider endorsement opportunities. In New York, the largest media market in the world, Tavares would presumably stand to gain the most from endorsement deals. At the same time, Tavares is from Mississauga, Ontario, which is about an hour away by car from Toronto. Perhaps he he might attract “hometown hero” type endorsement deals in the event he signs with the Maple Leafs.
Tavares is also motivated by a desire to win. Most of the teams he is visiting earned playoff berths last season. Each would have a plausible chance to compete for the Stanley Cup should it sign Tavares. Tavares might also value weather, culture, arts, restaurants—the list of factors could go on and on.
So we do not claim that Tavares will sign with the Stars or Lightning. However, all contract offers being equal, he would take home more money if he did.
Michael McCann is SI's legal analyst. He is also the Associate Dean for Academic Affairs at the University of New Hampshire School of Law.
Robert Raiola is the Director of the Sports & Entertainment Group of the CPA and Advisory Firm PKF O’Connor Davies.