Merrill Kelly’s Tax Considerations in MLB Move

It turns out, a few pennies can make a significant difference.

Merrill Kelly, a notable player in Major League Baseball, will pocket nearly $2.5 million more annually over the next two years due to his decision to sign with Arizona instead of California on his $40 million contract.

The large cash discrepancies stem from various factors, including California’s higher property taxes on luxury homes, disability insurance premiums, and its steep income tax rates.

But primarily, it’s about state income taxes.

California imposes a staggering top marginal tax rate of 13.3%. This includes a baseline of 12.3% plus an extra 1% for mental health services on incomes over $1 million. So, for a $20 million salary, roughly $2.63 million would head to the state.

On the opposite side, Arizona has a flat income tax rate of just 2.5%, meaning that for the same $20 million contract, the tax burden would be around $500,000.

This alone, an approximate difference of $2.13 million each year, explains just about everything.

California also collects state disability insurance at 1.3% without any wage cap. This could add another $260,000 for someone earning $20 million, while Arizona doesn’t have such a fee.

When you compare that to fixed asset and consumption taxes, it’s a small part of the equation.

Take a $10 million home, for example. California has an effective property tax rate of around 0.70%, resulting in about $70,000 a year, whereas Arizona’s is closer to 0.44%, or about $44,000—meaning a $26,000 difference annually.

And even if home prices surge, this tax gap can accumulate into significant amounts.

Sales tax rates vary based on location and how much one spends, but overall, the impact isn’t likely to change drastically. If, say, a player spends $1 million yearly on taxable items, the potential tax difference between the two states could translate to about $10,000 to $15,000 each year.

A big realization came when Kelly mentioned California’s tax burden as a major reason for departing from the San Diego Padres to return to the Arizona Diamondbacks.

“But like I said, they’re taking too much money out of my pocket,” he pointed out. “The taxes over there are at a different level.”

The veteran player went on to express that he’s aware of just how much money gets deducted when earning a salary in California.

“I had the number taker look up the number, but it made more sense to go home,” he reflected on his decision-making process regarding taxes.

It’s not just Kelly who feels this pressure; many athletes face the same issue related to California taxes.

For instance, Seahawks quarterback Sam Darnold will have to pay approximately $249,000 in what’s termed “jock tax” after competing in Super Bowl LX in Santa Clara. That’s about $71,000 more than what he earned for playing.

California requires out-of-state athletes to pay taxes for each “work day” they spend in the state, which for Darnold added up to eight days during the Super Bowl. The calculation was done by dividing his annual salary of $35 million by about 200 workdays, then multiplied by the eight days in California, applying the 13.3% tax rate.

If you switched to Arizona’s 2.5% tax rate, Darnold’s bill would drop to about $47,000. That’s an eye-opening reduction of nearly 80%. He’d still earn $178,000 from the game instead of losing out on his Super Bowl bonus.

So, when it comes down to it, playing the Super Bowl in California rather than Arizona could mean around $200,000 more in Darnold’s pocket. Quite a difference, right?