USC quarterback Caleb Williams is shown with NFL Commissioner Roger Goodell at the NFL college draft in Detroit. (Photo from Reuters via the Wall Street Journal)
In late April, the National Football League (NFL) held its annual draft of eligible college players. NFL teams choose players through seven rounds in reverse order of how the teams finished in the previous year: The team with the worst record picks first and the winner of the Super Bowl picks last. Teams are allowed to trade picks with each other. This year, although the Carolina Panthers finished with the worst record during the 2023 season, they had traded their first round pick to the Chicago Bears, who picked first.
The Bears choose University of Southern California (USC) quarterback Caleb Williams with the first pick in the draft. Drafted players usually have no choice but to sign contracts with the team that chose them. A player can refuse to sign with the team that drafted him and not play that year, hoping that the next year a team they like better will draft them. Very few players have chosen that option.
When football fans and sportswriters discuss whether a team is a good match for a player they usually focus on factors such as whether a player’s skills are well suited to the team’s style of play and on how many other good players are on the team. One other factor that is seldom discussed is whether a player will benefit more financially by playing for the team that drafted him rather than for another team. Players chosen in the college draft are paid an amount fixed as a result of bargaining between the NFL and the National Football League Players Association (NFLPA), which is the labor union that represents NFL players.
As the first pick in the draft, Caleb Williams’s contract will pay him $39.4 million in total over the next four seasons. A sizeable fraction of that amount—probably $25.5 million—will be in the form of a lump-sum bonus that the Bears will pay Williams in full when he signs his contract. The dollar amount Williams is paid as the first pick in the draft would be the same whichever of the 32 NFL teams had drafted him. However, football players—like everyone else—are interested in their after-tax income and state and local income tax rates vary widely. Football players pay state and local income taxes based on where their teams’ games are played. In the 17-game NFL schedule, teams play either 8 or 9 games in their home city and the rest (road games) in the home cities of their opponents.
Jared Walczak of the Tax Foundation has compiled a table showing the tax rate each NFL team’s players will pay in 2024 based on the state and local taxes levied in their home city and the state and local taxes levied by the cities where the team’s road games will be played. To keep the numbers simple, let’s look at how the much in taxes Williams will owe on a $20 million bonus, which the Bears will pay him as soon as he signs his contract. (Note that, as indicated earlier, Williams’s bonus is likely to be greater than $20 million and he will also receive a salary during his first season of about $3.75 million.)
Given the income tax rate levied by the state of Illinois (the city of Chicago doesn’t levy a tax on income) and the state and local taxes levied by the cities and states in which the Bears will play their road games this year, Williams will owe a tax of $1,079,075 on his bonus. (Note that we are ignoring the substantial federal income tax that Williams will owe on the bonus because the federal tax won’t change no matter which city he plays in.) The lowest tax that Williams would pay on the bonus is $120,421, which would be his tax if he played for the Jacksonville Jaguars. Neither the city of Jacksonville nor the state of Florida levies a personal income tax, so Williams would only owe state and local income taxes on what he earns playing in cities where the Jaguars play their road games. The largest tax Williams would pay is $1,301,028, which would be his tax if he had been drafted by any of the three teams that play in California: the Los Angeles Rams, the Los Angeles Chargers, or the San Francisco ’49ers.
Although college players who are drafted are obliged to play for the team that drafted them, after players have completed their contracts they have the option of signing with a different team. At that stage of their careers, players—and their agents—can take into account state and local income taxes when deciding which team to sign a new contract with.
HubbardOBrienEconomics.com Blog 