Washington may have at least one advantage over other pro sports cities when it comes to wooing high-priced free agent talent: the District’s tax laws.
Scott Boras, the agent for pitcher Max Scherzer and several other Nationals stars who has negotiated some of the biggest contracts in sports, said local tax laws allowed Scherzer and the Nationals to hammer out a creative contract that could provide a blueprint of sorts for other area teams courting big-name talent. That includes the kind of deals that likely would be required for the Wizards to lure, say, Kevin Durant back to his home town or for the Nationals to keep slugger Bryce Harper.
“I think it is, depending on where players live,” Boras said. “The dynamic of it is all the footprints have to be in place to make it happen.”
Boras said Scherzer’s $210 million contract is not only historic in terms of its size but noteworthy in structure. The deal takes advantage of District tax laws to save Scherzer money — possibly in the seven or eight figures — and keeps the team’s annual salary payments down. It would not have worked in New York, Los Angeles or most other baseball cities, he said.
“It took some of our brightest and best people in our office and in our ownership group to put this deal together,” Nationals General Manager Mike Rizzo said. “Without the structure of the deal the way it is, you don’t get this player here.”
Scherzer likely won’t ever owe the District a dime because the Home Rule Act exempts workers from paying state income taxes here while residing elsewhere — regardless of whether they make their home in Arlington or Alaska. So Scherzer or any professional athlete can easily avoid D.C.’s relatively high 8.95 tax rate for high-earners by simply living outside Washington each offseason.
Scherzer happens to make his home in Florida, where there are no state income taxes. Others simply choose states with a lower rate. For example, fellow Nationals Jayson Werth and Ryan Zimmerman live year-round in Virginia (5.75 percent tax rate), and Bryce Harper maintains a residence in Nevada, which also doesn’t collect a state income tax.
There are two key points that allow Scherzer to take advantage of local tax laws. First, the contract includes an aggressive bonus structure that means Scherzer can pocket $50 million that will never be subjected to a state income tax. Second, the total value of the contract will be paid out over 14 years — $15 million annually. Scherzer stands to earn $105 million after the contract expires in 2021. Assuming he maintains residence in Florida, none of that will be subject to local income taxes.
While some states might pursue that deferred money, that’s not likely to happen in the District, said Sean Packard, tax director at OFS Wealth, a McLean-based firm that deals primarily with professional athletes.
“For example, California will go after income earned one year and paid out in a second year,” Packard said
Boras said that had Scherzer agreed to similar terms with another team — at least those not based in Florida or Texas — he potentially would lose millions off his signing bonus, plus millions more on the rest of the deal. The deferred money allowed Scherzer to accept a lower annual salary during what could be the prime of his career.
Boras credited “the genius of Ted Lerner,” the Nationals’ principal owner, to helping hammer out the financing. Rizzo said the flexibility to spread the $210 million over 14 years was essential.
“In a straight seven-year deal, it would not have fit the parameters of our budget,” Rizzo said.
Taxing high-earning professional athletes has been a thorny issue in the District for years. The issue last came before the D.C. Council in 2011, when a so-called “jock tax” was proposed. The measure would have levied a local income tax on high-end athletes and entertainers who earn money in the District but live elsewhere. It was voted down.
Professional athletes often have to pay income taxes for their road games, and Scherzer stands to suit up for around 70 games each season in taxable jurisdictions. Taking into account spring training and postseason, only about one-third of his annual salary likely will be subject to state income taxes the next seven years.
While other D.C.-based teams, such as the Wizards, Capitals, United and Mystics, certainly have the opportunity to copy the blueprint — spread out financing and urge a player to set up base outside Washington — Boras said the savings might seem more pronounced with larger deals.
“It’s the kind of thing that works for any guy who plays in D.C. and lives in a tax-free state,” said Packard, who urges his Washington clients to live outside the District. “Living around here and having D.C., Maryland and Virginia in close proximity and people commuting to different places makes everything pretty unique.”