Crashing what had been a rather dull offseason party for free agents in Major League Baseball, the Chicago Cubs made a bold statement of their intentions to bring the Commissioner’s Trophy back to Wrigley Field by signing free agent ace pitcher Yu Darvish to a six-year, $126 million deal.
But how did they land the sought-after pitcher? Is it just the money, or did the Cubs have some sort of “special sauce” no one else had?
Some Cubs fans will point to Wrigleyville’s legendary charm. Others might cite Theo Epstein’s baseball pedigree and his world-class negotiation skills as a key tactic in the Northsiders’ win. And a World Series championship among three consecutive NLCS appearances doesn’t hurt in making a ball club a more attractive suitor.
But the too-soon approach of tax day—Tuesday, April 17—brings up another potential incentive. What role, if any, did Illinois tax play in helping the Cubs land Darvish? You may scoff, or even roll your eyes at the thought. But the state’s comparatively low tax rate might play more of a role than you think.
The state of Illinois has a name for being terrible when it comes to keeping what you earn. A combination of state government deficits and locally-mandated fees for everything imaginable add up with other factors in creating our state’s current reputation. Investment magazine Kiplinger places Illinois, along with Minnesota, California, and half a dozen northeastern states, among the least tax-friendly in the U.S.
Robert Raiola, a tax adviser with PKF O’Connor Davies and director of its sports and entertainment group, says that professional clubs in states like Texas and Florida use discussions about tax as one of their many tools, especially when courting free agents.
“Smart teams use this as a part of their calling card. If you’re, let’s say, the Astros or the Texas Rangers, they flaunt that. And they put that in their pitch book that you’ll pay no state tax here.”
But Raiola points out that for a player like Darvish, who just left California after a short stint with the Los Angeles Dodgers, Illinois may not be as bad as some places. With a 4.95 percent state income tax, Illinois is more attractive than Missouri (6.0 percent), New York (at 8.82 percent), Wisconsin (7.65 percent), and California (13.3 percent). And the Yankees, Brewers, and Dodgers were all reportedly on Darvish’s short list, along with the Minnesota Twins, whose state carries a graduated income tax that tops out at 9.85 percent.
“In a lot of cases the best gross deal is not the best net deal for the athlete,” said Raiola. “And so what a team like the Dodgers might offer a player would usually need to be significantly higher.” Not even counting cost-of-living variables, a team with California’s high state tax rate needs to offer additional compensation.
Raiola says this is an issue in all sports, but in his opinion, baseball may be a little different. “In the NFL sometimes you see free agent players go to one team or another because they like a coach’s system. Maybe if you’re a linebacker accustomed to a 3-4 defense, or if you’re a receiver a great franchise quarterback is a big draw,” Raiola says. “With pitchers, they each have a few signature pitches of their own, and a good pitcher can make their mark anywhere.”
That said, the chance to compete and win at the highest level is compelling for any athlete. With that in mind, number crunchers like those at FiveThirtyEight.com write that addition of Darvish makes the Cubs’ 2018 stock even higher. The fact that the Cubs are again the team to beat in the National League might have made the Cubs and Darvish a perfect match in 2018, instead of a more tax-friendly but less competitive situation with the Rangers.
One other thing that’s clear is that, behind closed doors, if the Cubs and the Dodgers—the two best teams in the National League—came to Darvish and his agent with the same $126 million deal, the choice would have been a no-brainer.
“The difference between signing for the Dodgers and signing for the Cubs is roughly the difference in the (state tax) rate, times the amount of the contract,” Raiola said. “Just on percentage alone the benefit of having signed with the Cubs (for Darvish) is over $10.5 million.”
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