Ed. note: Today, we're introducing you to the new guy. Tony, meet Going Concern; Going Concern, meet Tony. Alright, now that we got that out of the way… Tony Nitti is a tax partner at WithumSmith+Brown in Aspen, CO. When he isn’t writing or teaching about tax policy, you can find him skiing, mountain biking, or driving around in a van with his dog, solving mysteries. We anticipate Tony to be a regular staple around here so be nice to him or else. Find Tony on Twitter at @NittiGrittyTax
For the first time in recent memory, the arrogance of the New York Yankees’ “we don’t extend a player; we just re-sign them” policy has come back to bite them squarely in their pinstriped asses. A team in desperate need of offense just lost their biggest bat, as Robinson Cano has signed with the Seattle Mariners for 10 years and $240 million.
So how did it happen? How could a guy with so many ties to New York – from coming up through the Yankees’ farm system to recently signing with NYC icon Jay Z’s Roc Nation – forego the bright lights for the baseball purgatory that is Seattle? How will Cano sleep at night knowing he just left a team with 27 World Series championships for one with no World Series appearances and a lifetime winning percentage of .466%?
I’ll tell you how he’ll sleep at night: on a pile of money, surrounded by many beautiful ladies.
The Yankees reportedly offered Cano $160 million over 7 years, meaning on the surface, Cano pocketed an extra $80 million by joining the Mariners. But it goes deeper than that.
As a New York resident, Cano was subject to state income taxes at a maximum rate of 8.82%. This means that had he signed for $160 million, he would have paid over $14 million into the state coffers over the life of the deal. Making matters worse, NYC tacks on a maximum tax rate of 3.876% of its own, costing Cano another $6 million over seven years. And while Cano would be permitted to deduct the nearly $3 million of annual state and city taxes he would pay in New York, he’d lose the benefit of a good portion of those deductions — capped at 80% — to the return of the Pease limitation under Section 68.
Washington, however, has no state income tax. As a result, if Cano becomes a resident, he will pay state income tax only when the Mariners play a road game or spend a practice day in a state that imposes an income tax. When you consider that of their 81 road games, the Mariners will visit Texas 19 times for games against the Rangers and Houston, Florida for seven games against the Marlins and Rays, and Toronto for four games with the Blue Jays, Cano will play 111 of his 162 games in jurisdictions with no state income tax.
Add in the off days and Spring Training, and 77% of Cano’s income will not be subject to state tax. If we assume a conservative blended rate of 8% for the remaining income, Cano will pay approximately $4.4 million in state tax over the life of his deal ($240 million * 23% * 8%).
Ignoring federal taxes, Cano will walk away with $235.6 million in after-tax cash from the Mariners deal. Had he taken a hometown discount to sign with the Yankees, however, as seen above, the $160 million contract becomes $140 million, meaning Cano netted an extra $95.6 million by signing with Seattle.
So while today’s deal will undoubtedly leave Darren Rovell tweeting that Cano killed his “brand” by leaving New York, I can give you 95 million reasons why Cano shouldn’t care.