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Jock Tax

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An Analysis of the Impact of the Jock Tax on a Regional Basis

Prepared for
Professor McWhite

Economics 5900
Spring 2016

Prepared by
Zachary Zahedi
Zahedi16@uga.edu
22 April 2016

Abstract: The study focuses on the marginal tax rate that professional football players face in the United States. This tax rate, which is assessed based on the proportion of days spent in the state of work throughout the NFL season, is called the jock tax. NFL players are not the only professional athletes in the United States that face this tax, however, the structure of their pay and the salary cap figures make the analysis the most manageable. After examining specific player data, my study determined that were significant discrepancies between a player’s effective tax rate within their conference and division and the average salary differences. The argument that critics have against the jock tax claim that players may be severely detrimental to the after tax earnings of all NFL players.
Section I: Introduction
According to a recent study in early 2016, the state of California collected just over $229 million from nonresident athletes due to the imposition of the ‘jock tax’ in 2013 (Artz, 2016). California is among 19 states that impose the jock tax on athletes that are visiting said states for performing in professional sporting events. The jock tax represents an auxiliary income tax imposed on nonresidents by the state in which the players are traveling. For example, a player that travels to California faces an additional 13.3% tax rate as a proportion of their days spent in that state relative to the total days of the season. According to federal tax bracket data, any single filer that earns over $415,050 faces a 39.6% income tax (Pomerleau, 2016). After examining the NFL’s rules on the minimum salary for any player in the NFL along with the federal tax bracket data that has been previously referenced, one can determine that any given player that is a single filer receives an income above the top tax bracket. NFL athletes then face an additional tax in 19 of 22 states in which an NFL team resides. That same player will face the federal tax rate of 39.6% as well, exposing that player to an astonishing 52.9% income tax rate for the amount of time spent in California. These staggeringly high tax rates have given rise to concerns among the NFLPA about the value of the benefits that state governments receive due to the imposition of the jock tax and the question of fairness that this tax provides based upon average team salaries and the deviation of the salaries among the top 51 cap valued players. My research will determine if there are legitimate realized after-tax earnings discrepancies within the eight divisions in the NFL. If my research supports the hypothesis that there are disparities among the divisions, I will highlight which teams come out on top on payday. In 2015, the city of Cleveland faced a lawsuit with former Indianapolis Colts center Jeff Saturday regarding the legalities of the jock tax. Saturday argued that the city of Cleveland along with the state of Ohio violated the professional athlete’s due process rights because of the methods of the jock taxation (Yohnka, 2015). Yohnka’s 2015 study continued to say that the Ohio state court ruled in favor of the athletes in this case, ruling that the taxes must be assessed based on a ‘duty day’ formula instead of a proportional tax based on number of games played. The city of Cleveland asked the U.S. Supreme Court to back its position; however this attempt was to no avail. Since 1991, professional athletes have been battling local and state governments over the unfair aspects of the jock tax. In a 2011 study, Pahuskin points out that Florida, Texas and Washington State are the only U.S. jurisdictions that do not enforce the jock tax on NFL players. This study continues to determine that these aforementioned states without an income tax attempted to enact legislation that would tax nonresident athletes; however, these bills died before Congress due to the discriminatory aspects of such a tax (Pahuskin, 2011). To date, there is little academic literature regarding the fairness of the jock tax and the analysis of how states that enforce this tax are benefitting from imposing such a tax. There seems to be an agreement among researchers in this field of study that players are being charged unfairly based on the structure of the jock tax. In 2012, a study was published regarding nonresident sportsmen’s taxation in the United Kingdom; however, the UK’s tax system differs from the United States’ in many ways. This study does allow a researcher to draw upon other countries’ fair taxation systems (Simpson, 2012). The results of Simpson’s 2012 study conclude that any person that earns income in a country, regardless of their residency, is subject to an income tax based on total performance sponsorship income. This study continued to add that indirectly related income and the measurement of the marginal tax rate that the athlete should face is nearly impossible to design (Simpson, 2012). However, calculations resulting from compromise within the governing bodies of the sport and the country’s government do exist and should be carefully enacted to levy nonresident income taxation. My study will add to this current knowledge of the topic by expanding the conversation of the fairness of the jock tax to the United States and the NFL specifically. I will attempt to determine a tax rate that would be deemed fair based on the geographic regions in which these teams play, or I will suggest policy changes that will allow for a tax revenue share program within major sports leagues. I will use the economic principles of equilibrium tax rates, revenue sharing policies and the theory of incentives to analyze exactly how the jock tax could be changed to be equitable. In Section II, I discuss the existing literature that is relevant in the explanation of this subject. In Section III I describe the framework for my study and how I plan to evaluate the impact of the jock tax in the NFL. Section IV I will use mathematical analysis and regression analysis to determine the realized revenue from the jock tax on a regional basis in the NFL. In Section V I describe the procedure used in the study as well as the explanation behind how state governments could alter the taxation of nonresident athletes to make a more fair system. Section VI concludes with a summary of my results, which will be examined, based upon the conferences and subdivisions in the NFL. Based on these findings, I propose policy changes that could give way to a potentially more fair system of nonresident athlete income taxation.

Section II: Literature Review
Professional athletes stand out among the wealthy due to their lucrative contracts and signing bonuses. Tax structure among athletes differs across the United States just as income tax percentages differ among these same states. Although there are some similarities among income tax structure and the jock-tax system, not every state abides by the same rules. The top tax bracket in the United States, as of 2016, is 39.6% of income, which applies to single filers earning over $415,050 (Pomerleau, 2016). Interestingly enough, the NFL league minimum is $435,000 for a rookie and increases subsequently as players remain in the league longer. Therefore, all NFL players that are single filers are taxed at 39.6% of income at the federal level or at least a portion of their income is taxed at this rate. Among the 22 states that have NFL teams, 19 charge a state income tax (Baker, 2006). This income tax is then translated into the jock-tax by charging a player for his economic nexus in the state of business. These players are charged the full tax percentage in that state multiplied by a percentage of days spent in the visiting state out of their entire work year (Ekmekjian et al. 2004). The majority of research regarding the jock-tax focuses on percentages charged in certain states and how many athletes and legislators label the tax unfair. Many players have sued due to the ‘unfair play’ the state governments have over their performance in professional sporting events. The impact of these taxes is enormously beneficial to the states that impose them. Artz’s 2016 study showed that the state of California collected $229 million from the jock-tax alone in 2013. Of the $229 million collected, $54.2 million was collected from the NFL teams that played in the state during the 17-week season. Artz (2016) shows that California charges the highest jock-tax at 13.3% on the players and coaches that are in the state for business. Some claim that players in certain states are being unfairly compensated based on their marginal and effective tax rates due to the jock tax.
Athlete salaries are not only extremely high, but are also easily accessible for any public scrutiny (Shea, 2011). Pahuskin (2011) claims that other nonresidents that have a transitory presence in the states typically are not charged due to the nearly negligible amount of expected net revenues from such a process. States like Florida, Texas, and Washington do not charge income taxes, which makes the creation of any form of legislation for a jock-tax infeasible. Washington’s Chris Strow proposed such legislation as retaliation to Washington’s athletes being taxed when out of state, but watched the bill fail before the state legislature (DiMascio, 2007). Tennessee only charges state income tax on dividends earned in the state, which prohibits the taxation of NFL player salaries (Walczak, 2015). Research suggests that players are affected by the jock tax at an extreme rate. For example, if the Carolina Panthers had won the Super Bowl, Cam Newton would have won $102,000. Due to the jock-tax rate in California, Newton’s $20 million salary creates tax revenue for the state of $130,000 for the Super Bowl and the two other games scheduled in the 2016-2017 season in Oakland and Los Angeles (Artz, 2016). Based on this tax structure, Newton will net a loss after taxes for winning the Super Bowl of $28,000. Newton will obviously not lose money this season, due to his enormous contract and his endorsement deals, but the idea that winning the Super Bowl could create a net loss for a player due to high taxes is disproportionate. The disproportionality of the jock tax system not only lies with the players that are taxed the most based on their region of play, but also with the states that have lower marginal tax rates. DiMascio’s 2007 study claims that the jock-tax simply creates a shift of tax revenue from the lower-income tax percentage states to those that charge a higher personal income tax. The potential revenue earned by states such as Texas and Florida is completely lost due to their respective legislatures prohibiting personal state income tax laws (DiMascio, 2007). Team staff members on the lower end of the pay scale are affected heavily by the enactment of this tax, furthering the quality of legislation that supports the jock-tax.
My research is motivated heavily by the discrepancies among states regarding their marginal income tax rates and the enactment of the jock-tax. There is also a compelling factor that pertains to the labor economics that NFL players face. Most workers are able to relocate to avoid higher taxes but players are drafted and signed to whichever team they can play for. The producers, the NFL team executives and owners, usually are able to reallocate their inputs (players) but sometimes it is difficult to trade a player. I find it very interesting that players that are signed by teams that reside in California are affected negatively on a marginal level based on a similar salary intake when compared to a player signed by a Florida-based team. By focusing on divisional play in the NFL, I will be able to differentiate my study from prior research by providing a breakdown of the magnitude of the jock-tax on certain players across the United States. Although the top athletes are financially compensated heavily for their abilities on the playing field, there are definite winners and losers when it comes to tax filings in April.
Section III: Theoretical Framework For my study, I have developed a framework for determining if there are certain teams that are, or are not, paying their players in accordance with the tax rates that the state imposes on those teams. Pahuskin’s 2011 study highlights the jock tax percentage that each state imposes on their respective football programs. Based on this study, I have determined an effective tax rate each team faces in their divisional play. For example, in the AFC South division there are four teams: the Houston Texans, Indianapolis Colts, Jacksonville Jaguars, and Tennessee Titans. Using Pahuskin’s data, along with Walczak’s 2015 study on the jock tax, I have determined that the Houston Texans, Jacksonville Jaguars, and Tennessee Titans face a 0% income tax percentage while the Indianapolis Colts face an 8.98% tax on their earnings when calculated through the duty day formula. The effective tax rate that these teams face are calculated through a formula that I developed which subtracts the marginal tax rate the states impose on the team from the AFC South divisional tax average. The Texans, Jaguars and Titans face an effective tax rate of 2.245% while the Indianapolis Colts face an effective rate of -6.735% (Walczak, 2015). This calculation is helpful due to the analysis of the divisional play of these teams when playing away from home. Indianapolis pays 8.98% at home but pays 0% in their three away games in the division, which creates a negative effective tax rate for their players. These calculations were continued throughout all 8 divisions of the NFL and are going to be used to determine if the taxes are imposed accordingly with their players’ average and median salaries. After determining the effective tax rates the teams and players face, I obtained data from Spotrac regarding player salaries and cap figures for each team (Spotrac, 2016). One of the considerations I had for my study is the salary cap figure that each team reports differently. After considering that factor, I determined the best way to hold a constant for this factor is to use the top 51 salaried players on each team’s payroll. These top 51 players are also the players that see the majority of the field on the active roster of 53 players. After determining that consideration, I used the salary cap figure that each player contributes to the total team payroll, which includes any signing bonuses, roster bonuses, and base salary. After obtaining this raw data for all 32 teams, I calculated the average salary, median salary and the standard deviation of the salaries for each team. I then calculated the same measures for the league in its entirety in order to develop a comparison value. This was an essential part of my study due to my interest in salary differences among teams and the tax rates that these players face. In theory, a higher average salary along with a lower standard deviation of salary is ‘good’ for the player because the players, on average, are earning more along with the fact that these players would be earning a relatively similar amount per year. Using the comparisons of the average salaries, median salaries, and standard deviation of the salaries, my study will determine if there are players that are ‘shorted’ on pay day in accordance with the effective tax rates they face. If we value the output of football players as relatively the same as the average player, the average higher salary should coincide with the higher tax rate. If these players are not compensated correctly for the state in which they preside, there must be incentives to play such as bigger market teams and draws to the city in which they play, higher signing bonuses, better facilities and a better fan base.
Section IV: Data Analysis After determining the framework, my study continued to address the potential disparities between tax rates and earnings from the programs for which they perform on a week-to-week basis. Figure I shows the manner in which the effective tax rates were determined for each team, along with the marginal tax rate that the jock tax system imposes. This is an important chart to analyze to use in the final steps of my study due to the importance of the tax rate that these teams face when playing interdivisional games away from their home stadium. Figures II, III, and IV are graphs showing the aforementioned measures in comparison to the league values. In order to make the graphs more legible and closer to the axes, I converted the differences in the average salaries, median salaries, and standard deviation of the salaries into percentages of the league values. Figure II shows how each team’s average player earns more or less, as a percentage of the league average, than the average player in the entire league along with the effective tax rates that each teams face. Figure III shows how the median salaried player on each team earns more or less, as a percentage of the league average, than the median salaried player in the NFL in its entirety. Figure IV shows how the standard deviations of the salaries on each team differ, as a percentage of the league standard deviation of salaries, than the league standard deviation. These are all important measures to be used as comparison tools to determine if the league measures differ from the teams and the magnitude of the difference. These values were carefully examined and used to determine which teams, and therefore states, have the biggest discrepancy in pay with the league on an averaged level. After examining the graphs and data, my study continued to analyze whether players on specific teams were snubbed on payday in regards to after tax compensation. Teams in states that face higher jock tax rates should be paying their players in accordance with the higher tax rates, however this does not agree with the data. Through examination of the NFL teams in states with higher income taxes, my study determined that there was a significant discrepancy between player compensation and the tax rate they face. In a simplified explanation, the players that are being taxed the most are also being paid the least on average. On average, a San Francisco 49ers player will receive 17.77% less than the league’s average player in regards to salary. The standard deviation of the players’ salaries is lower than the league average, which means that these players are all compensated relatively more similar than the league. When this information is paired with the average salary differences, the data shows that the entire team is being paid less than the NFL average on all levels and at a more consistent rate. Theoretically, this should be the opposite due to the taxes they face and the non-profit status of the NFL as a whole. Through careful examination of the data, I determined that there are players that lay on both sides of the spectrum of pay fairness. For example, the San Francisco 49ers players are unfairly paid based on their tax rates while the New York Jets seem to be fairly compensated for the income tax rate that the jock tax system imposes. Figure I shows that the New York Jets face an 8.97% tax rate in the state of New York. Away games for the New York Jets yield a -3.24% effective tax rate, meaning they will make more money in the other states in which they travel. However, they play half of the season at home and should be fairly compensated. Figure II shows that the average Jets player earns 12.39% more than the average NFL player that is in accordance with the theory of higher earnings correlating with higher taxes. If the salary percentage difference on average is higher than the league average, then the effective tax rate for that player should also be higher to compensate for the higher earnings. Jets players are being overcompensated for the effective tax rate they face. Another pertinent example to my study was the data regarding the Detroit Lions. Not only are they being paid 8.91% less than the league average; they also face a positive effective tax rate. Essentially, Lions players are being paid less and also being taxed more, creating an extreme negative externality for these players. This example highlights the exact issue that my study looks to underline; players would be paid more equitably according to the tax rates in which they face. The Washington Redskins face the exact opposite situation. Redskins’ players receive 4.28% more salary than the league average while being taxed at an effective tax rate of -3.74%. Redskins’ players are making more money and paying fewer taxes on average, which shows another extreme situation in which the players are unfairly taxed by the jock tax system. The Tennessee Titans provide an example in which the league should attempt to emulate among all teams. An average salaried Titans player earns 2.245% more than the league average while facing an effective tax rate of 1.79%. The higher taxes are in accordance with the higher salaries at a nearly perfect level. Theoretically, this is exactly how NFL players should be compensated based on their taxes; however, there are issues with the jock tax system that must be amended in order to find a perfect medium similar to what the Titans players face. Based on the range of data that my study was conducted upon, there are a handful of improvements or concerns that may be addressed. The salary cap figure is different for all teams that I examined because there are no two teams that have the exact same cap figure based on the top 51 capped players. For further work, my study could examine a longer time span of data to make the salary comparisons more equitable over the long run.
Section V: Conclusion My study used the analysis of existing literature on the topic of the jock tax system and relevant data pertaining to the salaries of players on all 32 NFL teams. My study intended to highlight the discrepancies between tax rates and player compensation in each state. Although there are mixed results regarding the fairness of the taxes levied on each team and program, there are obvious results that point towards the unfair characteristics of the jock tax system. The San Francisco 49ers and the San Diego Chargers are the highest taxed teams in the league and their players are compensated on average, lower than the league’s average player. This underlines the issue with the jock tax system due to the deficient compensation that big market teams like the 49ers and Chargers face. My study carefully examined the data and analyzed it order to determine whether the jock tax system is fair. After concluding that there are some teams that are adversely affected by this system, these adverse effects give rise to potential policy changes. The NFL could take an average tax percentage of all teams and the states in which they reside and make a league-wide marginal tax on top of the federal tax. This tax revenue could then be evenly shared amongst the city and state governments, decreasing the deadweight loss amongst players that are adversely affected. This policy change could also make a level playing field for players looking for bigger market teams and could decrease under the table incentives that some players are given. In conclusion, my study has highlighted the differences between tax rates for certain teams and the salaries these players are given. Policy changes have been suggested and these changes have been weighted in terms of positive externalities that potentially occur. NFL players, regardless of how lucrative their contracts may be, should be compensated fairly based on the taxes they face.

Appendices
Figure Ia:

Figure Ib:

Figure II:

Figure III:
Figure IV:
References
Artz, Matthew. 2016. "BRIEF: 'Jock Tax': Super Bowl a windfall for California." Contra Costa Times (Walnut Creek, CA), January 27. Newspaper Source Plus, EBSCOhost (accessed February 1, 2016).
Bruno, Michael, Steven Hadjilogiou, and Robert H. Moore. 2015. "The International Athlete and Entertainer: A Summary of Important U.S. Tax Considerations." Florida Bar Journal 89, no. 4: 29-33. Index to Legal Periodicals & Books Full Text (H.W. Wilson), EBSCOhost (accessed March 2, 2016).
Difrischia, Richard R. 2000. "State and Local Taxation of Nonresident Athletes." Journal Of State Taxation 18, no. 4: 120. Business Source Complete, EBSCOhost (accessed March 2, 2016)
DiMascio, John. 2007. The ‘Jock Tax’: Fair Play or Unsportsmanlike Conduct”." University Of Pittsburgh Law Review 68, 953. LexisNexis Academic: Law Reviews, EBSCOhost (accessed February 18, 2016).
Ekmekjian, Elizabeth C., James C. Wilkerson, and Robert W. Bing. 2004. "The Jock Tax Contest: Professional Athletes vs. the States--Background and Current Developments." Journal Of Applied Business Research 20, no. 2: 19-30. EconLit, EBSCOhost (accessed February 2, 2016).
MIKE BAKER - Associated Press, Writer. 2006. "Some States Impose a 'Jock Tax'." AP OnlineNewspaper Source Plus, EBSCOhost (accessed February 1, 2016).
Pahuskin, Steven. 2011. “Heads Up! Recent Federal and State Attempts to Address Nonresident Income Taxation perpetuate Selective Enforcement and Unfairness of the ‘Jock Tax’”. The Tax Lawyer no. 4: 64. American Bar Association, JSTOR (accessed February 12, 2016).
Pomerleau, Kyle. 2016. "2016 Tax Brackets." Tax Foundation. (Accessed February 17, 2016).
Shea, Bill. 2010. "Playing to win with 'jock tax'." Crain's Detroit Business 26, no. 11: 9. Regional Business News, EBSCOhost (accessed February 1, 2016).
Simpson, Alan. 2012. “Taxation of Non-Resident Entertainers and Sportsmen: The United Kingdom’s Definition of Performance Income and How it Ought to be Measured." Washington University Global Studies Law Review 11, no. 3: 693-714. Index to Legal Periodicals & Books Full Text (H.W. Wilson), EBSCOhost(accessed March 2, 2016).
Spotrac. 2016. “NFL Team Payrolls” USA TODAY Sports Media Group (accessed March 14, 2016).
Walczak, Jared. 2015. “State Individual Income Tax Rates and Brackets for 2015”. Tax Foundation. (Accessed February 17, 2016.
Yohnka, Dennis. 2015. "Cleveland appeals 'jock tax' ruling to US Supreme Court." AP Regional State Report - IllinoisNewspaper Source Plus, EBSCOhost (accessed March 2, 2016)…...

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