Yesterday, news broke that the Texas Rangers have agreed to sign star outfielder Shin-Soo Choo to a 7 year $130M contract. This news comes after reports that Choo rejected a 7/$140M offer from the Yankees earlier this month. So why would Choo turn down the Yankees’ offer to sign a smaller contract just two weeks later? The reason, or at least part of the reason, might be state income taxes – which don’t exist in Texas, but are pretty high in New York. As I pointed out following Robinson Cano’s exodus to Seattle, state tax rates can have a substantial effect on how much a player takes home at the end of the day.
With the Cano negotiations, Seattle offered so much more than the Yankees that the disparity in income taxes wasn’t a huge deal. But it’s conceivable that Shin-Soo Choo would be donning the pinstripes right now if New York State didn’t have a personal income tax.
By my math, the Yankees’ offer and the contract Choo ultimately signed both netted him about the same amount after taxes – around $11M per year – despite the fact that the Yankees offered him nearly $1.5M more annually.
While Texas has no state income tax, New York State’s top tax rate of 8.82% is one of the highest in the country – only players on the Washington Nationals and the five teams in California are taxed harder – and the tax burden is even higher for those living in New York City, which has its own income tax for residents. Another factor to consider is the cost of living, which is exorbitantly high in the New York City area. Eleven million dollars is a lot of money no matter where you live, but will stretch a lot further in Texas than it will in New York.
Still, in spite of all of these costs, the Yankees (and even the Mets) manage to sign plenty of quality free agents and usually don’t have to vastly overpay to get them to come. There have even been some cases of players leaving money on the table to come to the Yankees – Carl Pavano unfortunately comes to mind. After all, money isn’t the only factor for most players and there are other, non-financial benefits to playing for the Yankees. By signing with the Yankees, a player is almost guaranteeing that he’ll be a part of a competitive team, which is obviously a big deal to most players. And while New York may be expensive, it offers plenty of cultural and entertainment options, particularly for the well-to-do.
New York’s high taxes may put the Yankees at a slight disadvantage when bidding for free agents, but it’s probably not enough to make a noticeable difference in most cases. We have no way of knowing what factored into Shin-Soo Choo’s decision, but based on the offers he received, it looks like he may be an exception to the rule – a rare case where income tax arbitrage moved the needle enough to alter a player’s decision.
Image by NewJack984 (Own work) [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons