Plenty of draft observers shook their heads sadly at the sight of Texas A&M offensive tackle Luke Joeckel going to the woebegone Jacksonville Jaguars at No. 2, rather than the on-the-rise Kansas City Chiefs at No. 1. But Joeckel might have as many as 830,000 extra reasons to be holding his head high as he prepares for life in North Florida.
First and foremost, though: Joeckel and his fellow draftees better make sure they’ve got a top-flight financial planner in their corner.
Why? The vagaries of state taxes. The federal government takes an equal bite out of every player’s hefty new paycheck, but beyond that, players have plenty of different beaks dipping into their bank account for a taste…and making the wrong choice can cost players hundreds of thousands of dollars before they even set foot on a football field.
Consider: Central Michigan’s Eric Fisher, the No. 1 overall pick, is headed to Missouri, which has a 6 percent state income tax. Florida, meanwhile, has no state income tax, and neither does Texas. And that comes in handy when talking about exactly how much cash ends up on a paycheck.
OverTheCap.com, an NFL salary tracking site, estimates that the top pick will receive a $14.5 million signing bonus, while the second pick will receive $13.8 million. Now, as for how much of that ends up in the athlete’s pocket and how much goes to the state? That’s where it gets tricky.
In most cases, signing bonuses are taxed based on the athlete’s state of residence, provided that the bonuses meet certain conditions, i.e. nonrefundable, and not contingent on playing a single game. (It’s more complicated than that, but we’ll leave it there for now since eight-figure signing bonses aren’t an issue for most of us.) Nine states, including Florida, Texas, Washington and Tennessee, have no state income tax. If you’re not a resident of one of those states and you sign your fat bonus check as soon as you get it, you’re likely going to be paying your home state plenty of money.
But athletes can’t just scoot off and establish residency in another state; residency requirements differ, and the state from which they depart can challenge the legitimacy of their new status. Again: here’s where planners earn their salary.
Salary is a slightly different consideration. Athletes must pay state taxes in every state in which they perform services (i.e. play games), so the benefits of living in a tax-free state are mitigated somewhat. Joeckel would pay state taxes on roughly half his games. Still, that’s better than paying on virtually all of them; over the course of an estimated four-year contract, Fisher would pay about $230,000 more in state income tax than Joeckel.
Of note: endorsement income of any stripe, including commercials, appearances, and the like, is taxed based on the draftee’s state of residence, not necessarily where the endorsement filming, say, took place. This is precisely why Tiger Woods and many other highly-compensated athletes are residents of Florida.
Of course, being a first-round pick, even a low-end one, carries with it inherent benefits that extend far beyond reputation, straight to the bottom line. OverTheCap.com estimates that the difference in 2013 signing bonuses between the 32nd (the last pick of the first round) and the 33rd (first pick of the second) is about $944,000, with the total four-year salary differential being about $1.3 million. For perspective’s sake, the difference between the 31st and 32nd pick, the last two in the first round, is about $75,000 in signing bonus and $103,000 in total salary.
The flip side is that for teams, a second-round pick can be a tremendous bargain. A new study conducted by Worcester Polytechnic Institute found that since 2000, second-round picks have produced 70 percent of the value of their first-round counterparts but at a cost of only 40 percent of their salary.
"That's a significant value and it tells me that general managers should give more value to second- and third-round picks," said Craig Wills, head of WPI’s Department of Computer Science. (For the record, the most cost-effective teams over the last 13 years have been the Pittsburgh Steelers, the Green Bay Packers and the Inidanapolis Colts, while the least-efficient drafters have been the St. Louis Rams and the Cleveland Browns. Not much surprise there.)
So, yes, congratulations, draftees; you’re coming into astronomical sums of money, no matter where you’re picked. Just make sure you’ve got someone to help you hold onto it.
-Follow Jay Busbee on Twitter at @jaybusbee.-