The Potential Impact of Trump’s Tax Policies on MLB Free Agency

The Presidency of Donald Trump will have a wide ranging impact on not only the political world, but the sports world as well. We are in the midst of the offseason for Major League Baseball (“MLB”) in which teams all throughout the league are scrambling to acquire or re-sign the most coveted free agents on the market. Whether your favorite team is able to sign that big free agent or see him walk away comes down to one thing; money. The Trump administration, in line with most conservative and Republican policies, has promised massive federal tax cuts to help stimulate the economy. These looming tax cuts coupled with the labor talks between the league and the players union presents some interesting issues to monitor going forward.

The MLB unlike other major professional sports does not impose a salary cap on its teams, meaning that any given team may pay whatever amount of money they want to any given player. The Yankees for decades were notorious for paying exorbitant salaries for their new free agent signings, i.e. Alex Rodriguez. In 2013, his salary of $29 million per year was more than what the entire Houston Astros team earned combined! In addition to the free agency period which captures most of the headlines during the offseason, the collective bargaining agreement between the players and the league is set to expire on December 1, making it a top priority for MLB Commissioner Rob Manfred to resolve before a work stoppage ensues.

A work stoppage seems quite unlikely however and the two sides are expected to come to a resolution. Amongst the issues the parties are debating is the tax threshold for the league. This is also referred to as a “competitive balance tax” or “luxury tax” which imposes penalties on certain teams who spend past a certain threshold on their players. The idea of a luxury tax is to keep the league more competitively balanced.

State tax laws can often impact where a certain free agent may or may not sign. Florida, Texas and Washington are three states that do not levy state income taxes on its citizens meaning that a free agent who signs a 5 year $100 million contract in a state like Florida would take home millions of more dollars than a free agent in New York who signs that exact same contract. In a recent Sports Illustrated article they examine the impact of Trump’s proposed tax plans on the MLB. The minimum salary for a current player is slightly over $500,000 per year which immediately puts them into the highest federal income tax bracket at a rate of 39.6%. Under Trump’s plan, he would lower the rate to 33%.

In addition to the federal income changes, the Sports Illustrated article also examines Trump’s plan for itemized deductions. These deductions allow people to decrease the amount that their income is taxed. Itemized deduction examples can include medical expenses and charitable contribution. “Currently, those players can offset some of their federal tax burden by the amount they pay in state income taxes. Under Trump’s plan, however, they would potentially lose some of the benefit of paying higher state taxes on their federal returns.” While no player in the MLB can really say they are under financial strain, these potential alterations to the federal tax policies, which in turn will affect state tax policies is something for these players to pay attention to going forward.

These tax policies will not be implemented overnight. They often take years to fully go into effect, i.e. the Bush Tax Cuts during the 2000s. The article closes in saying, “Players might want to defer their highest salary to years 2018 or 2019. This is particularly true if players and their representatives are skeptical of Trump being re-elected in 2020.” The federal tax policies have an impact on all Americans, athletes included. While certain state tax policies may affect where a free agent signs, because the salaries are so exorbitant to begin with, it may not make or break that player’s ultimate decision. These potential tax policies will be more likely to affect the bench players and younger players trying to make a name for themselves in the league.

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