A July 9 report from the Tax Foundation notes more and more state governments are using controversial “jock taxes” to extend state income taxes to residents of other states. The jock taxes are so named because they require traveling professional athletes and other team employees to pay income taxes in every state where games are played.
“The jock tax began with California trying to get revenge on Michael Jordan and the Chicago Bulls for beating the Lakers in 1991,” said David Hoffman, adjunct scholar with the Tax Foundation and coauthor of the new report. “Illinois fought back with a retaliatory tax the next year. Since then, many other states have joined in.”
“Today, of the 24 states with pro teams, 20 have enacted jock taxes, as have a half-dozen cities,” the report noted. (See Figure 1.)
California is one of the 20 jock-tax states. According to personal finance author Kathy Kristof, in a July 18 Los Angeles Times article on jock taxes, “The Detroit Pistons trounced the Lakers in the NBA Finals, but the state of California may get the last laugh when it mails tax bills to Motor City stars such as Chauncey Billups and Tayshaun Prince.”
Kristof added, “When out-of-staters land in California to work, the Golden State takes a share–9.3 percent–of their daily pay while they’re here, to be precise. And it’s not small change. Over the last decade, so-called nonresident taxes have soared nearly threefold in California, now amounting to about $1.3 billion annually.”
Other Professions Suffer Too
For highly paid professional athletes, Hoffman noted, “credits currently cancel out most of the collections.” The big waste of money is on paperwork to deal with the tax. The laws are starting to spread to other professions, however, where the pay is not so high, and hence the tax and paperwork costs can be significant.
The Tax Foundation report showed states are expanding the jock tax concept to include other types of nonresident income from non-sports-related professions. “For example, New Jersey has begun taxing visiting attorneys, and Cincinnati has levied a tax on touring skateboarders,” noted Hoffman. “Several jurisdictions have begun taxing traveling entertainers.”
“First, it was just Michael Jordan and the Chicago Bulls, then all professional athletes, and now trainers, scouts, lawyers, and even amateur skateboarders are being taxed when they leave their home state,” said Hoffman.
“This is a real slippery slope,” said Andrew Chamberlain, a Tax Foundation spokesperson. “If jock taxes continue to be applied this aggressively, more and more professionals that travel to other states are going to be subject to them. Eventually, a traveling executive would have to pay tax in every state that he visits during the year. That creates an untenable level of complexity.”
Jock Tax Revolt Rising
“Passing federal laws to restrict state taxation is a tricky issue, but it needs to be addressed for workers and companies,” said Chamberlain. “Otherwise, business travelers could face such a nightmare of multiple state tax forms that they might become reluctant to travel on business.”
The report was released to coincide with Major League Baseball’s All-Star Game in July in Houston, Texas. Texas is one of the few states with a professional sports team that does not have a jock tax, as it has no income tax. Texas players nevertheless feel a tax bite, since they pay sales and use taxes at home, as well as other states’ income taxes on the road–without the offsetting deduction on federal income taxes that can be taken by players whose states tax income. (See Table 1.)
The Tax Foundation study gives three major reasons to consider the jock tax as ill conceived:
- The tax is poorly targeted. Advertised as one that hits only ultra-rich athletes, the jock tax has quickly spread to many people with moderate incomes, such as trainers and scouts, and to other professions.
- The tax is arbitrary. Professionals in other occupations with comparable incomes over their working lives, such as doctors and corporate executives (see Figure 2), are not penalized by a “doc tax” or “exec tax,” though that is changing. New Jersey has recently started taxing visiting lawyers.
- The tax imposes an extraordinary administrative burden on some people, who must file more than a dozen state income tax returns.
Athletes Make Tempting Targets
“Professional athletes make tempting targets for state lawmakers because they represent a highly concentrated pool of wealth that can be taxed with little enforcement,” notes Hoffman. “Like other nonresidents, athletes can be taxed by states without fear of political pressure. Most important, professional athletes cannot take their business elsewhere: each professional sports league is a government-backed monopoly that decides when and where its employees will work.”
Hoffman concludes, “A reasonable approach to nonresident taxation would not include jock taxes. All employees of professional sports franchises are salaried employees who should be paying all their taxes in the states where they live or the states where their employers are located.
“This change would not cost states much revenue because credits currently cancel out most of the collections. Without the jock tax, states’ income tax systems would operate on a more principled basis. Athletes and their unfortunate moderate-income colleagues–scouts, coaches, and support staff–would not be singled out for unfair treatment, and a great deal of unproductive tax paperwork would be eliminated.”
Scott Hodge ([email protected]) is president of the Tax Foundation.
For more information …
The full Tax Foundation report, “Nonresident State and Local Income Taxes in the United States: The Continuing Spread of ‘Jock Taxes’,” is available online on the Tax Foundation Web site at http://www.taxfoundation.org/sr130.pdf.