Move over, Andrew Luck: Oakland Raiders quarterback Derek Carr is on track to supplant the Indianapolis Colts quarterback as the highest-paid player in the National Football League by signing a five-year, $125 million contract. That works out to $25 million a year—but, as ESPN’s Adam Schefter has noted, Carr has a strong incentive to backload his contract: state income taxes.
The Raiders are, of course, Las Vegas-bound, though exactly when they’ll take up residence in Nevada is anyone’s guess (certainly not before 2019). California’s top marginal income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rate is 13.3 percent. Nevada’s is zero, as the state doesn’t levy an individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. .
Now, that doesn’t mean that Carr could escape state income tax liability altogether. Earning income out of state can expose an individual to that state’s income taxes, and states are particularly aggressive about taxing out-of-state athletes. They even have specific provisions, commonly known as “jock taxes,” to collect that revenue.
While based in California, none of this matters for Carr’s overall tax liability, even though it creates extra work for his accountant. When you pay taxes to another state, you get to take a credit in that amount against your home state tax liability—and since California’s rates are higher than those in every other state, Carr’s overall state tax liability remains the same as if he never set foot outside of California: an estimated $3,300,291 at $25 million a year, before any credits or deductions he could take.
When the Raiders move to Las Vegas, Carr won’t owe any income taxes to his home state, but he will still have to pay jock taxes, this time without any offsetting credit. Jock taxes are basically just individual income taxes, but they have some special rules about how they are calculated. Specifically, for more than two decades, states have uniformly used what are known as “duty days” to determine what percentage of an athlete’s total earnings are attributable to that state. (Cities with local income taxes held out with other models longer, with Cleveland using a “games played” formula until 2015.) Duty days involve calculating the total number of days that an athlete engages in income-attributable work, and determines what percentage of those days took place in a given state.
So let’s make a few assumptions. First, we’ll assume that Carr has 200 duty days a year. Second, we’ll assume that for each away game, he has three duty days attributable to the host state. Obviously, this is a simplification: for a game in Los Angeles, the team might fly up the night before, whereas for a game in Green Bay, they’re more likely to arrive earlier. Still, it gives us something to work with: each home game puts 1.5 percent of Carr’s salary within the taxing authority of another jurisdiction.
If Carr were playing the 2017 season out of Las Vegas instead of Oakland, then instead of owing $3.3 million in state and local income taxes, he’d face a burden of a mere $158,469. (This is higher than the amount he’d pay to other states playing out of Oakland, since the away game against the Los Angeles Chargers would now be out-of-state.) That’s a tax savings of over $3.1 million. It represents an effective state and local income tax rate of 0.6 percent, compared to 13.2 percent while based in California.
Here’s how that breaks out by states in which he’d have an away game. Florida and Tennessee forego individual income taxes (and Tennessee repealed a stand-alone jock tax a few years ago). Baltimore County, Kansas City, Philadelphia impose local income taxes in addition to state liability.
| State | State Tax | Local Tax | Total |
|---|---|---|---|
| Calif. | $33,886 | — | $33,886 |
| Colo. | $17,363 | — | $17,363 |
| Fla. | — | — | — |
| Md. | $19,948 | $12,000 | $30,561 |
| Mo. | $22,274 | $3,750 | $26,024 |
| N.Y. | $24,762 | — | $24,762 |
| Penn. | $11,513 | $12,995 | $24,508 |
| Tenn. | — | — | — |
| Total | $129,744 | $28,745 | $158,489 |
All this assumes that Carr’s contract pays out $25 million a year. But with tax savings this significant, Adam Schefter is correct: all else being equal, Carr would be smart to backload his contract.
Errata: An earlier version of this blog post neglected the fact that FedExField is, of course, located in Landover, MD.
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