At the beginning of this year, MLB free agent Max Scherzer caught the attention of many when he signed a $210 million, seven-year contract with the Washington Nationals. Not only did his contract’s stature capture the attention of many, but as Rick Maese of the Washington Post described “[Scherzer’s] contract is not only historic in terms of its size but noteworthy in structure. The deal takes advantage of District tax laws to save Scherzer money — possibly in the seven or eight figures…” While Scherzer’s contract did not discover some new unknown tax law, it’s noteworthiness may have caught the attention of the last group he would wish to pay attention to his new signing – those who have the power to change the District tax laws his “deal takes advantage of.”
As was detailed when Scherzer signed this new deal, the District of Columbia imposes an income tax but technically does not impose a ”jock tax”. Though that isn’t for lack of effort. The D.C. mayor typically has attempted to include a “jock tax” in the district’s annual budget nearly every year. However, under the U.S. Constitution, Congress has authority over the District, which it exercises by requiring D.C. to submit it’s annual budget for approval. Congress has nixed the “jock tax” every time it has been included in the proposed budget. This is most likely due to the fact that states would be required to give their professional athletes credit for taxes paid to D.C. – directly reducing the revenues in the states in which those athletes live and (more importantly) in which Congressmen represent. Since there are no full congress members from D.C., not much political capital is spent annually voting against assisting D.C.’s revenue raising efforts. The fact that the District of Columbia has one of the highest income tax rates in the U.S. – 8.95% for the highest income bracket – does not help their case, either.
The District can currently tax income, but the Home Rule Act exempts individuals from paying state income taxes if they don’t live in D.C. The result is that D.C.’s professional athletes can avoid the relatively high tax rate by living outside the District each offseason, something previously-mentioned Max Scherzer took advantage of when he signed a $210 million contract with the Washington Nationals earlier this year. Scherzer lives in Florida, which does not have a state income tax. Other D.C. athletes have done the same. Fellow Nationals Jayson Werth and Ryan Zimmerman live year-round in Virginia, which has only a 5.75% tax rate, and Bryce Harper resides in Nevada, which also does not collect a state income tax.
Implementing a “jock tax” seems counter-intuitive, since the current income tax exemption arguably draws some athletes to D.C. But the “jock tax” provision of the budget is only a small piece of the bigger picture for D.C. residents. More than half of the District’s $13 billion budget is funded through taxes collected from D.C. residents and businesses, but decisions on how that money is spent must first be approved by Congress. Every year the District submits its budget request to Congress, who considers the budget as part of one of its federal appropriation bills. And approval can take months, especially if there are broader arguments over the federal budget.
As was detailed when Scherzer signed this new deal, the District of Columbia imposes an income tax but technically does not impose a ”jock tax”. Though that isn’t for lack of effort. The D.C. mayor typically has attempted to include a “jock tax” in the district’s annual budget nearly every year. However, under the U.S. Constitution, Congress has authority over the District, which it exercises by requiring D.C. to submit it’s annual budget for approval. Congress has nixed the “jock tax” every time it has been included in the proposed budget. This is most likely due to the fact that states would be required to give their professional athletes credit for taxes paid to D.C. – directly reducing the revenues in the states in which those athletes live and (more importantly) in which Congressmen represent. Since there are no full congress members from D.C., not much political capital is spent annually voting against assisting D.C.’s revenue raising efforts. The fact that the District of Columbia has one of the highest income tax rates in the U.S. – 8.95% for the highest income bracket – does not help their case, either.
The District can currently tax income, but the Home Rule Act exempts individuals from paying state income taxes if they don’t live in D.C. The result is that D.C.’s professional athletes can avoid the relatively high tax rate by living outside the District each offseason, something previously-mentioned Max Scherzer took advantage of when he signed a $210 million contract with the Washington Nationals earlier this year. Scherzer lives in Florida, which does not have a state income tax. Other D.C. athletes have done the same. Fellow Nationals Jayson Werth and Ryan Zimmerman live year-round in Virginia, which has only a 5.75% tax rate, and Bryce Harper resides in Nevada, which also does not collect a state income tax.
Implementing a “jock tax” seems counter-intuitive, since the current income tax exemption arguably draws some athletes to D.C. But the “jock tax” provision of the budget is only a small piece of the bigger picture for D.C. residents. More than half of the District’s $13 billion budget is funded through taxes collected from D.C. residents and businesses, but decisions on how that money is spent must first be approved by Congress. Every year the District submits its budget request to Congress, who considers the budget as part of one of its federal appropriation bills. And approval can take months, especially if there are broader arguments over the federal budget.
In an effort to control its own budget, in 2013 the D.C. Council passed the Budget Autonomy Act, which would separate the District’s local budget process from the federal process. As with any “ordinary” legislation, Congress would still review the local budget, but after a 30-day review period the budget would automatically be approved unless Congress moved to block it. Unfortunately, D.C. has never passed a budget under the Budget Autonomy Act. Debates over the Act’s legality sparked a lawsuit, and an injunction was placed on the Act by a federal judge last year.
This year, things could be turning around. The injunction was vacated by the Court of Appeals, which sent the case back to the local D.C. Superior Court to decide if the Act is legal. Because the Court of Appeals’ decision came so late in the budget process, the Council had only prepared one District budget containing both federal and local portions. The District submitted the budget through the usual federal appropriation process, and after approval from the mayor and Council, a second, identical budget was sent to Congress as “ordinary” legislation. Two live versions of the District’s budget are currently making their way through competing approval processes, a situation unprecedented on Capitol Hill. While unprecedented, one precedented issue remains in both budgets – if either become law unedited, D.C. will have a “jock tax”.
That being said, D.C. shouldn’t be holding it’s breath for a “jock tax” quite yet. Because one budget was submitted through the federal appropriation process, it is likely that any alterations by Congress will be final, at least for this year. D.C.’s future budget autonomy lies in the hands of the D.C. Superior Court, which may not take up the case until after the D.C. Council actually passes a budget under the Budget Autonomy Act. Until then, D.C.’s mayor and the D.C. Council Chairman have said that they would consider the budget passed as soon as it clears the 30-day review period without being overturned.
While this is all currently up in the air with much speculation, Scherzer and other Nationals should keep a close eye on D.C.’s developments – if D.C. does implement a “jock tax” Scherzer would lose around $700,000 to D.C. taxes.
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This year, things could be turning around. The injunction was vacated by the Court of Appeals, which sent the case back to the local D.C. Superior Court to decide if the Act is legal. Because the Court of Appeals’ decision came so late in the budget process, the Council had only prepared one District budget containing both federal and local portions. The District submitted the budget through the usual federal appropriation process, and after approval from the mayor and Council, a second, identical budget was sent to Congress as “ordinary” legislation. Two live versions of the District’s budget are currently making their way through competing approval processes, a situation unprecedented on Capitol Hill. While unprecedented, one precedented issue remains in both budgets – if either become law unedited, D.C. will have a “jock tax”.
That being said, D.C. shouldn’t be holding it’s breath for a “jock tax” quite yet. Because one budget was submitted through the federal appropriation process, it is likely that any alterations by Congress will be final, at least for this year. D.C.’s future budget autonomy lies in the hands of the D.C. Superior Court, which may not take up the case until after the D.C. Council actually passes a budget under the Budget Autonomy Act. Until then, D.C.’s mayor and the D.C. Council Chairman have said that they would consider the budget passed as soon as it clears the 30-day review period without being overturned.
While this is all currently up in the air with much speculation, Scherzer and other Nationals should keep a close eye on D.C.’s developments – if D.C. does implement a “jock tax” Scherzer would lose around $700,000 to D.C. taxes.
Interested in keeping up with TaxaBall? Follow us on twitter or get new posts delivered to your inbox!
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