Julia Chirkova
By Alex Halverson
The Seattle Times
(TNS)
Seattle’s professional sports franchises have long leveraged a distinct competitive advantage over their counterparts in larger, more affluent metropolitan areas like New York and Los Angeles. A significant factor in this edge has been the absence of a state income tax for athletes playing on home turf. However, the recently enacted "millionaires tax" on high-income Washington residents is poised to significantly alter this landscape, introducing a new layer of complexity for team executives and ownership groups, including the Seattle Seahawks and Mariners. This new levy, scheduled to take full effect in 2028, will impose a 9.9% tax on any income exceeding $1 million for Washington’s highest earners, a bracket that prominently includes numerous professional athletes.
The legislation, which aims to generate revenue for public services, has already sparked considerable debate. Tech industry leaders in Seattle have voiced strong opposition, arguing that the tax could deter aspiring entrepreneurs from launching startups in the city and may prompt existing businesses to relocate their executive suites to more tax-friendly jurisdictions. This sentiment is mirrored within the city’s sports community, where the financial implications for player recruitment and retention are becoming a central concern.
The "Millionaires Tax" and Its Impact on Sports
The introduction of a 9.9% tax on income over $1 million fundamentally reshapes the financial calculations for both players and teams in Seattle. For athletes whose earnings frequently surpass this threshold, the tax represents a substantial reduction in take-home pay when playing in Washington. This directly impacts not only Seattle-based athletes but also visiting players, who will be subject to what is commonly known as the "jock tax" – a tax levied by states on athletes for the income earned while performing within their borders.
John Wilson, a partner at K&L Gates specializing in tech transactions and sports law, highlighted the growing unease surrounding the tax within the professional sports sphere. "The main takeaway from those conversations and others that I’m having with my clients is that this is just adding a new layer of uncertainty and complexity that everyone is trying to wrap their minds around," Wilson stated. He noted that during a recent networking event attended by local sports lawyers, the "millionaires tax" was a pervasive topic of discussion, underscoring its significance for those involved in athlete contracts and team operations.
The concerns are not merely theoretical. Seahawks General Manager John Schneider has been among the most vocal critics, expressing his belief that the tax could undermine the team’s ability to attract top free-agent talent. During a mid-March radio appearance on Seattle Sports 710, Schneider explicitly stated that the tax could hinder the team’s competitive advantage in recruiting. He reiterated these concerns weeks later in a meeting with reporters, emphasizing the potential negative impact on the Seahawks’ roster building. "It’s going to affect all the sports teams, for sure," Schneider remarked at the time.
This sentiment is particularly relevant given the recent successes of Seattle’s major league teams. The Seahawks, fresh off a Super Bowl championship, and the Mariners, looking to build on recent playoff appearances, have both seen key players like Seahawks wide receiver Jaxon Smith-Njigba and Mariners catcher Cal Raleigh secure significant contract extensions. As these teams continue to strive for postseason success, the ability to retain and attract star players through competitive compensation packages will be paramount.
Historical Tax Advantage and Academic Insights
Historically, Washington’s lack of a state income tax has been a potent recruitment tool, allowing teams to offer competitive salaries that effectively translate to higher net earnings for players compared to those in states with income tax. This advantage is particularly pronounced within leagues operating under strict salary caps, such as the NFL. In these scenarios, a team’s ability to offer a higher net income, even with a comparable gross salary, can be a deciding factor in a free agent’s decision.
"Washington has historically punched above its weight in free agency for its market size, relative to Los Angeles and New York," Wilson observed. "In part, that’s just been because of the tax environment." This assertion is supported by the fact that in the NFL, only two teams from states without an income tax have won a Super Bowl in the past two decades: the Seahawks and the Tampa Bay Buccaneers. While other factors like market size, team performance, and fan base are crucial, the tax environment appears to play a discernible role.
Academic research has also explored the correlation between state income taxes and professional sports team success. A 2021 study published by the University of Illinois at Chicago, authored by former professor Erik Hembre, investigated this relationship. Hembre’s research suggested a negative correlation between higher state income tax rates and team winning percentages. According to his findings, for every percentage point increase in state income tax rates, the winning percentage of professional sports teams declined by approximately 0.7 percentage points.
Hembre, now a senior economist at the Federal Reserve Bank of Minneapolis, acknowledged that the precise impact could be influenced by the sample size of his study but expressed confidence in the overall trend. "There are a number of things that affect whether players want to live and work in your city, like the weather and nightlife," Hembre stated. "Those definitely matter, just like tax rates would. So you get great teams like the Dodgers, Yankees, Warriors and Lakers, all teams that have won championships and living in areas that have high tax rates." He further suggested that while factors beyond taxation exist, lower tax rates might offer a more direct advantage to smaller market teams, citing the San Antonio Spurs’ sustained success in Texas as an example.
Navigating the New Financial Realities
The implementation of the "millionaires tax" necessitates a strategic recalibration of player compensation strategies. For leagues like Major League Baseball (MLB), which does not have a salary cap, wealthy teams can already afford to assemble rosters of top-tier talent. However, even in MLB, creative contract structuring could become more prevalent. Teams in California, such as the Los Angeles Dodgers, have demonstrated success in building championship teams through innovative compensation packages that account for high state income taxes. This often involves structuring contracts with significant signing bonuses, deferred compensation, and other incentives designed to optimize a player’s net earnings.
The NFL’s hard salary cap presents a more constrained environment. For Seattle teams, the absence of state income tax has allowed them to potentially offer more attractive net compensation to free agents, even if the gross salary appears comparable to offers from teams in higher-tax states. The introduction of the "millionaires tax" erodes this advantage.
While leagues like the NHL and WNBA may have lower minimum salaries that could shield some athletes from the highest tax brackets, the growing popularity and increasing endorsement opportunities for stars in these leagues mean that many will eventually surpass the $1 million income threshold.
Future Contract Structures and Market Dynamics
The anticipation of the new tax has already prompted discussions among sports executives and legal professionals about how player contracts will evolve. It is widely expected that contract negotiations will become more intricate, with a greater emphasis on structuring deals to mitigate the impact of the 9.9% levy. This could involve a more frequent use of:
- Signing Bonuses: A larger portion of a player’s compensation might be paid upfront as a signing bonus, which is typically taxed at a lower rate than regular salary in some jurisdictions.
- Deferred Compensation: Players may agree to defer a portion of their earnings to future years, potentially when they are no longer playing in Washington or when tax laws might have changed.
- Performance-Based Incentives: Contracts could feature more complex incentive structures tied to individual and team performance, allowing for flexibility in compensation.
- Endorsement Income Management: While the tax primarily targets playing income, athletes and their agents will likely explore strategies to manage endorsement deals, though these are often negotiated separately and can be subject to different tax treatments.
The Seattle metro area, while a significant market, ranks as the 15th largest in the United States according to the Census Bureau. This places it in a tier below the perennial powerhouses of New York, Los Angeles, and Chicago. In this context, the tax advantage has been a crucial equalizer, allowing Seattle teams to compete effectively for talent. The erosion of this advantage could have a tangible impact on the team’s ability to attract and retain players, potentially forcing them to pay higher gross salaries to compensate for the increased tax burden.
As the 2028 implementation date approaches, the sports world in Seattle will be closely watching how these financial and legal adjustments unfold. The "millionaires tax" represents a significant shift, and its long-term consequences for the competitive landscape of Seattle’s professional sports teams remain a subject of intense interest and strategic planning.
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