Max Scherzer and the Washington Nationals agreed to a seven-year, $210 million contract with provisions that take advantage of District tax laws to save Scherzer money and keep the team’s present-day payments down via historic deferrals, sources familiar with the deal told Yahoo Sports.
Scherzer, 30, received the second-largest guarantee ever for a pitcher, just $5 million behind the contract Clayton Kershaw signed a year ago, though the payment structure is entirely different. Scherzer will get $15 million a year for the next 14 years, sources said, deferring half the money until after the contract expires. It is by far the largest sum ever deferred in a deal, not quite matching Bobby Bonilla’s 25-year deferral from the Mets in length but more than tripling it in value.
To make up for the loss with the deferrals – because of inflation and lost interest-earning opportunity, future money is worth less than present – Scherzer will receive $50 million in the form of a signing bonus spread over multiple years, the source said. The benefit to structuring the contract as such is that because his permanent residence is outside the District, Scherzer will not be subject to a state income tax on money earned in Washington, D.C.
The Home Rule Act, established in 1973, exempts nonresidents from paying state income taxes at the capital’s 8.5 percent rate. In practice, it means Scherzer would save more than $4.25 million of the $50 million bonus he’ll receive in Washington, D.C. – though just how much of that would be subject to tax elsewhere depends on the state in which he earns the money and where he resides. Additionally, none of the $105 million in deferred money would be subject to state taxes, potentially saving Scherzer another $8.92 million. All told, the lack of state income tax in D.C., when compared to playing in tax-heavy states, could save Scherzer eight figures. One source said the tax advantages could end up at more than $20 million, offsetting much of the money lost via deferrals.
Much like Florida and Texas, which don’t have a state income tax, playing in D.C. provides a significant boon for out-of-state athletes, said Robert Raiola, a CPA who specializes in helping athletes. “His goal was to get over $200 million,” Raiola said. “And he was able to do that with deferred compensation while saving money on the tax front.”
The tax play is a rejoinder against those who argue that the deal’s so-called “net present value” – how much it’s worth today based on the future money being worth less than present – is less than $210 million. One calculation similar to what Major League Baseball uses pegs the deal at a net present value of around $185 million, an average annual value of about $26.4 million a year.
Calculating net present value is difficult, particularly without details as to when the Nationals will pay his bonuses. Should one arrive in January of a year, for example, it would be worth more than one in July. Either way, the deferrals do eat significantly into the actual value of the deal. Ever-shifting tax rates make it even tougher to pinpoint exactly how much Scherzer will save, too.
The advantage for the team isn’t as significant as one might believe, either. Baseball’s collective-bargaining agreement calls for the Nationals to start funding the deferred payments by July 1, 2017, with enough money in a liquid asset to cover the first payment in 2022.
Scherzer laid a monstrous bet on himself, and it paid massive dividends. He rejected a seven-year, $160 million offer last spring from his old team, the Detroit Tigers, and ended up with the best team in baseball on the richest free-agent contract ever signed by a pitcher, no matter how much of it he’ll receive in 2028.
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