This year, Duncan will pay an estimated $288,000 in the jock tax, a form of nonresident income tax that athletes pay when their teams hit the road to play in arenas and ballparks in other states. That seems fair enough, given the mega-millions he and other pro athletes pocket for three-pointers, punts, and pitches. It's also true that most states credit residents for taxes paid elsewhere.
But the dirty little secret of the tax world is that athletes get different treatment from other highly paid workers -- say, investment bankers and corporate lawyers -- when it comes to collecting nonresident taxes. And only a few staunch defenders of the usually rich and often famous pros seem disturbed by the double standard. "Any notion of taxation based on profession is obviously outrageous," says Stephen Kidder, a Boston tax attorney who represents players' unions in baseball, hockey, and football.
Most states carry on their books a tax on nonresidents who visit for business purposes. Twenty states have now passed special taxes that target the incomes of pro athletes, following California, which in 1991 enacted the first jock tax to sock it to Michael Jordan and the Chicago Bulls after they beat the Los Angeles Lakers in the NBA final. Only four states, and Washington, D.C., that have pro sports franchises do not levy a jock tax. Cincinnati imposed one last December.
Some of these taxes take aim at athletes so blatantly that they should get state officials thrown in the penalty box. In Ohio, cities can levy taxes on nonresidents only when they visit for more than 12 days. The exceptions? Pro athletes and entertainers. It's even worse in Alberta, Canada, where home and visiting hockey players pay a tax that the government then distributes to the province's NHL franchises, the Calgary Flames and Edmonton Oilers. "It goes straight from the players to the owners," scoffs Kidder.
The jock tax is especially unfair because unlike other high earners, pro athletes can't steer clear of states that come down hard on them. Exhibit A-Rod: Alex Rodriguez, the $25 million-a-year Texas Rangers shortstop. Rodriguez lives in Texas, a no-income-tax state. He can't demand that Rangers management refrain from scheduling games in California (9.3% nonresident tax) or Missouri (6%). Yet if the Rangers played all games at home, A-Rod's tax bill would be slashed by more than a half million a year.
State officials contend that the nonresident tax codes are blind to profession. "If an engineer comes to California to work on a project, he's subject to the same rules," says Denise Azimi of the California Franchise Tax Board. But when Joe Wage Earner pops in, enforcement tends to be leaky. "States aren't going to pay attention to a $50,000-a-year salesman for $200," says David K. Hoffman, an economist at the Tax Foundation in Washington. Of course, one reason athletes get zapped is that their movements and salaries are easy to track.
Jock taxes haven't faced legal challenge because the principle of paying on income earned in a nonresident state is well-established, says Kidder. But two lawsuits pending in Illinois are testing that state's refusal to credit athletes for taxes paid in other states. Chicago Cubs slugger Sammy Sosa, lead plaintiff in one of the suits, claims Illinois owes him $38,169 for double payment in 1998.
Most players refrain from whining about the jock tax. Says Arizona Diamondbacks outfielder Steve Finley: "Is it fair? No. But we do make a lot of money."
Admittedly, it's hard to work up a lot of outrage for A-Rod, who lives grandly on what governments aren't taking. But what's good for the ballplayer ought to be good for the CEO. That's just playing by the rules. Hyman is contributing editor for sports business.