You could say that Major League Baseball pitcher Merrill Kelly threw the San Diego Padres a curveball during free agency this winter when the hurler turned down the team’s three-year offer and opted to return to his former team, the Arizona Diamondbacks.
As it turns out, Kelly weighed the decision of where to sign in part on the income tax in each team’s home state.
“I don’t think it’s any secret on how much money you get taken out of your pocket when you go to California,” Kelly told Foul Territory (1). “The taxes over there are a different level. We had my numbers guy run the numbers and it just made more sense to come home.”
Those “numbers” weren’t just the $40 million that Kelly will make over the next two years (2). It’s also the 13.3% “millionaire’s tax” rate in California (3), compared to Arizona’s flat income tax rate of 2.5% (4).
Some quick math shows the discrepancy: Arizona’s tax on $40 million works out to about $500,000 per season. Compare that to California’s rate, which would nab roughly $2.7 million a season for the tax man.
And Kelly’s situation isn’t uncommon in sports, where state income taxes can tip the scales for athletes deciding where to play next.
Over the years, many pro athletes have admitted that state taxes influenced which cities they’d decide to play in.
In 2022, for example (5), NFL wide receiver Tyreek Hill noted that when the Kansas City Chiefs moved to trade him that year, he steered the trade to the Miami Dolphins instead of the New York Jets because of “those state taxes man. I had to make a grown-up decision.”
The Jets actually play in New Jersey, where the top tax rate is almost 11% for income over $1 million (6). Florida, meanwhile, boasts no income tax.
A year later, NBA forward Grant Williams signed with the Dallas Mavericks for $54 million after playing four seasons with the Boston Celtics. As with Hill, Williams pointed to the higher taxes in Massachusetts — a 9% rate for those making over a million dollars (8), compared to Texas which, like Florida, levies no state income tax.
“In Boston, it’s really like $48 million with the millionaire’s tax,” Williams shared with Boston.com (7). “So $54 million in Dallas is really like $58 million in Boston and $63 million in L.A.”
Meanwhile, last year The Canadian Press explored whether the six NHL teams that play in states with no income tax boast an advantage over other teams “in attracting and retaining players,” with NHL Deputy Commissioner Bill Daly admitting that some teams in the league have raised income tax as a concern.
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And the issue goes beyond pro athletes. Despite both states imposing income taxes on residents, Arkansas and Mississippi passed laws to eliminate them on Name, Image, and Likeness (NIL) earnings for college athletes — allowing their school athletic programs to compete with those in states with no income taxes (10). Mississippi is also in the process of eliminating its state income tax altogether.
That said, the strategy of tethering your career to states with low, or no income taxes works for some pro athletes, but there’s more to consider for regular folks looking to relocate and save some money in the process.
If you’re weighing your own career opportunities out of state, the best advice is to consider more than just how much state income tax you’ll pay each year. That’s because pro athletes making millions are better equipped to absorb any added costs in low or no income tax states.
“In some cases, you could end up paying more in total state and local taxes because of sky-high property or sales taxes,” warns TurboTax Attorney and Analyst Rocky Mengle (6). “Plus, the cost of living might be much higher, which could wipe out any tax savings from the lack of an income tax.”
For example, TurboTax noted that while both Louisiana and Arkansas place among the lowest state income tax rates in the country, they also place first and fourth, respectively, on the list of highest combined state and local sales taxes.
The costs of housing and related expenses can also offset any income tax savings. For example, Optima Tax Relief points to Florida — often a haven for snowbirds, warm weather workers and retirees. However, thanks to the threat of disasters from floods to hurricanes (11), Optima reports that home insurance “in certain counties can have premiums of more than $10,000 — nearly five times the national average.”
As such, Optima adds, the higher home insurance premiums in Florida — along with other costs — “can cancel out the expected savings from not paying state income tax.”
California, on the other hand, may boast the highest state income tax in the country (12), but Fidelity notes that “it also ranked among the 15 best states for married filers at the same income level.”
All of which suggests that, if you’re pulling in millions a year for tossing a ball or shooting a puck, choosing to play in the cities with the lowest state income tax rates may make sense. But for everyone else, there are many other financial factors to consider before packing the car and moving across state lines.
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Foul Territory – X (1); MLB.com (2); KDA (3); Tax Foundation (4); New York Post (5); TurboTax (6); Boston.com (7); Choate (8); TSN (9); Clarion Ledger (10); Optima Tax Relief (11); Fidelity (12).
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
