Cliff Lee: Dollars & Sense Part2

At 1 AM or so on 12/14/2010 the twitter verse exploded with the news that there indeed was a secret team in the Cliff Lee sweepstakes and oh goodness he was heading to Philadelphia. Phillies 5 years/24 million average overcoming the Yankees 6 years/22 million average.

Once again there were cries of money being left on the table. To which I reply, oh please Cliff Lee left no dollars on the table and maybe, just maybe, he went where he wanted to pitch.

Yesterday I gave you Arlington v New York, today I present Philadelphia v New York. At least when it comes to the world of taxes, cost of living, and money left on the table. *I'm using Philadelphia and New York City as the basis due to the fact that is where the teams play and I have no idea where Cliff and his family plans on residing.

Okay that 59% is a pretty incredible number. Let us put that together with the state and city taxes I was talking about in yesterday's post - though Pennsylvania actually has a tax of 3.07%, which is higher than Texas's 0%, though lower that New York's 11.3%.

My screen capture software doesn't seem to like today's graphic so I'll bullet point the important numbers

• **$32,450,000 Additional Amount over Five Year contract to cover cost of living difference (this has been adjusted from the initial figure of 64 to include that half the amount is not going to be adjusted for cola - well at least until below)
• **2,263,250 Additional Amount per year to cover difference in state taxes (this has been adjusted to include that half the games are on the road)
• **$28,942,650 Actual Amount per year Yankee off would need to be for Cliff Lee to not leave money on the table

Nearly 29 million dollars. Which is is way less than my original estimate of 37 million dollars and for that I'm thankful for those who have taken the time to read and comment. Either way, can we stop with the Cliff Lee left money on the table nonsense? Both numbers were certainly large enough to leave Cliff and his family feeling pretty good for life.

Oh, the 16 million dollars 6th year option. That presumes that Cliff won't pitch again after this contract. Okay, even if he retires after this contract he will still have made more money in Philadelphia than he would have in New York City the 12 million dollars easily covered due to the cost of living differences.

***Okay, the following two paragraphs are the third updates to this entry and I want to thank @Bill_TPA and @vijtable for bringing up diminishing value (aka diminishing marginal value) when it comes to cola for a contract this large. Or as an economics major @sabometrics wrote to me, "The concept of diminishing marginal utility makes the cost of living adjustments and, to a large extent the difference in the value of the contract, moot. Cliff Lee would likely only enjoy 150 million dollars a marginal amount more than he will enjoy 120 million dollars. Of course it is impossible to say what his specific marginal utility curve looks like but it's pretty safe to say that any of these contract put him at a pretty flat area of the curve."

Well, that seems to put a damper in my original conclusion when it comes to the largness of the numbers. I could even just hide behind "half the amount is not going to be adjusted for cola" but really there is no way that number holds up. Taking into account just the state tax dollars and a slight cost of living adjustment the numbers still add up, though not nearly as spectactularly cool as before and certainly not nearly the 59% difference as before. However I still feel strong enough about my original conclusion - or at least to figure that the Yanks would have had to upped the offer at least $1.00.

Cliff gets to pitch where he wanted to pitch, and in this case he certainly will be well paid and not a cent of New York's money was left on the table.

*
Clarification of why I chose these particular cities. Yes, you can use lesser suburbs (or wealthier) ones.
** Per valid points and feedback this number has been adjusted to reflect that he will spend 1/2 the year in Philadelphia and 1/2 the year in Arkansas
*** The third update

Cliff Lee: It's a Matter of Dollars and Sense

A lot has been said and written about Cliff Lee coming to New York or remaining in Texas. Mostly around how much more money he'll get.

I have zero knowledge when it comes to the inner workings of the mind of a major league pitcher. Luckily for you readers I do have some basic knowledge of taxes and the cost of living.

Rather than bore everyone with a long talk on tax planning I'm going straight to the visuals.

Using
http://www.bestplaces.net/col/?salary=21000000&city1=54804000&city2=53651000 I generated the following information.

Excuse me a moment while all my friends living in New York figure out a way to move to Arlington, Texas.

I know major league players don't HAVE to live in the city the team plays in (so feel free to put in the zip codes of the surrounding towns). What I do know from once upon a time of living in New Jersey and working in Brooklyn is that major league players have to pay New York City taxes. Don't ask me how it works just know that from a legal perspective it does.

The cost of living calculator did not seem to include the 11.3% New York State and New York City employment taxes that would be taken from Cliff's paycheck. Simply put Texas does not have a state income tax and New York does.

(There are some additional adjustments based on how many home games v road games, for simplicities sake I'm going to stick with 11.3% in taxes across Cliff's entire paycheck).

Presuming Cliff and his wife file jointly the pertinent tax information is as follows:

In New York pays more money in state taxes and offsets the 830K in federal taxes. So not only does Cliff Lee's cost of living go up he also pays an additional $1,542,750 to pitch in New York. I'm sure someone will comment that you can deduct states taxes paid from your federal taxes amount.

I already included the deduction in my calculations.

Yankee fans take heart. Know that if Cliff Lee does come play for the Yankees it will be because he probably thinks it is the best chance to win the World Series and it won't be because he is a pitching mercenary. Despite what people are sure to say if he signs.