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Photo Credit: USA TODAY Sports Images

The supposed Toronto tax disadvantage is overblown and a waste of everyone’s time

If there’s one annoying part of free agency speculation that’s emerged over the last few years it’s the constant talk about how taxes factor in to a player’s decision on where to go. At best someone casually mentions it as a potential draw to low or no-tax states like Florida or Nevada, and at worst it manifests itself in a hilariously false oversimplification of how this all works. No joke, I’ve heard people claim that Steven Stamkos turned down the Leafs for the Lightning because in Florida he can take home his entire $8.5-million per year due to that state carrying no personal income tax.

That was bad. This isn’t much better:

Want to know how you get these numbers? Simply plug in the federal tax rate in the States (around 36% for someone making $5.9-million) and let ‘er rip. Add in the individual state tax if applicable (in the case of Vegas, Nevada, it isn’t) and there you have your numbers. Easy peasy, a Vegas Golden Knight makes a million dollars more per year than a Toronto Maple Leaf, apparently. In fact the only players taxed harder than those in Toronto are those in Montreal. In other words there are 29 other markets Leafs players should like to play in from a financial perspective, negotiated numbers being equal. This is why you get Mitch Marner vs Brayden Point contract comparisons that say Point can sign for millions less due to Florida’s lack of taxes.

Except this is a load of garbage, it isn’t this simple, and contract negotiations with the Leafs particularly aren’t going to create these nice tidy lines. Why? Because taxes are complicated and boring, and if you think they’re painful for you, they’re a lot more of a puzzle for a professional athlete. (Which is why most of them don’t know or even care about them, contrary to what we keep hearing).

NHL players, like NBA and NFL players, don’t sign a $10-million dollar contract and go to the same building to punch in a 9-to-5 every day. They practice at home and play half their games there, but they play the other half of their games on the road spread over 30 locations. They pay what’s called a ‘jock tax’ to earn their money in those states playing those games in front of those fans who paid to see them. That in itself adds a wrinkle to this straight-line tax comparison many sports writers want to draw, but to try to break down every player’s home tax versus what they might pay on the road is arduous and likely doesn’t make much of a difference anyway, because there’s so much else going on.

The point is that pro athletes’ finances aren’t simple plug-and-play like the new CapFriendly tool tries to capture. NHLers make their money in 31 places, and some of them don’t even become residents of the city they call “home”. For instance, LeBron James left the Cleveland Cavaliers for the Miami Heat for four seasons but remained an Ohio resident, paying Ohio taxes. Plenty of hockey players likely do something similar, especially on short term deals.

And we haven’t even gotten into what advantages the Leafs might actually have themselves, namely their deep pockets and ability to front load contracts with signing bonuses out the wazoo – other Canadian markets like Montreal can likely do the same to some degree. Anyone who’s half-paid attention in an economics class realizes that the time value of money means that money in your pocket today is worth more than the same amount tomorrow. Put another way, while Auston Matthews’ entire contract pays him $58-million over five seasons, he’ll have about $33-million of it paid out by next July due to the way the Leafs structured it with massive signing bonuses. Most teams cannot do that, they simply can’t write those sorts of cheques up front. So Matthews has $33-million next summer for two seasons work, in US dollars mind you, to do whatever he wants: Invest it, make down payments on property, etc. That in itself likely cancels out, and perhaps even flips the so-called tax disadvantage Toronto is supposedly in compared to other locations when it comes to signing players.

All of this is to say that this stuff with pro athletes’ taxes isn’t straight-forward and it’s never going to be. Hell, it isn’t for most people who work regular jobs. Accountants get crafty, they find ways to avoid taxes, and so on. To boil it down to plugging in a simple federal and/or state tax rate percentage and subtract from a salary is laughably over-simplistic. And we also haven’t dipped into costs and quality of living, which are significant elements as well.

Look, I’m certainly no tax expert, as you can probably tell. And sure, living in a place with no state income tax may have a marginal financial advantage as it pertains to your 41 games played there. In fact, when Mark Stone was signed by the Golden Knights, Ryan Lake at Forbes described it as hitting the tax lottery, because compared to signing in California where taxes are among the highest in the country, Stone would save (if advised properly, mind you)…wait for it…$71,000 a year on a $9,500,000 cap hit. No doubt nice to have, but certainly not the millions per year purported by others. It’s for those reasons the way much of the sports media portrays this situation for free agency comparison purposes is hilariously exaggerated and off-base, and plenty of people are wasting time believing it’s a significant factor when it clearly isn’t.

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  • Bob Canuck

    I agree that the tax differentials between jurisdictions is overstated by some people. As noted by Ryan, the time value of money has to be considered when looking at financial issues. For example, I calculated (before income taxes) that the Matthews contract with its July 1 signing bonuses provides approximately $2.2 million more present value over the term of the contract than a salary-only contract that is paid equally each pay period. (I used a 5% discount rate).

    I also want to comment on the linked-to Forbes article. The numbers presented make no sense. First, I can’t imagine that a player pays income tax on compensation not received (escrow). Accordingly, the escrow amount should be excluded from income subject to tax. There is a Hockey News article that used input from Newport Sports Management in the determination of how much a player takes home. In the article, escrow was deducted before calculating the amount of income taxes owed.

    Second, the jock tax is what you pay when visiting other jurisdictions. The Forbes article does not show the state taxes in respect of home games. Looking at the Mark Stone example, Stone would pay no state income taxes on his 41 home games per season; if he was a San Jose Shark, he would pay $631,750 ($9,500,000 x 50% x 13.3%) in respect of his home games per season. (I have assumed no escrow in this example; the $631,750 would be reduced if there was escrow. I also assumed that the contract is salary only).

    My rant is over. Thanks to Ryan for writing a very good article that is certainly timely.