SF Giants’ $168 Million Pitch to Jon Lester Falls Short After CA Taxes

December 19,  2015
In a heated bidding war that ended last week, the Chicago Cubs scored big by signing left-handed pitcher Jon Lester with a $155 million deal for six years and a vesting option for a seventh. Lester’s annual $25.8 million earnings will put him in second place for the highest annual salary paid to a pitcher, behind only Clayton Kershaw with $30.7 million. To draw Lester to Wrigley Field, the Cubs raised their bid from $135 to $155 million in the final inning, and yet this wasn’t the highest offer Lester received.
The San Francisco Giants’ last bid gave him the largest potential contract: A seven-year deal for around $168 million. Lester’s pros and cons list with each team was sure to be a long one. On the money side, while the Giants offered the highest figure, California taxes would have put Lester in the 12.3 percent tax bracket and since his income is over the $1 million threshold, subject to an additional 1% tax due to the Mental Health Services Tax. With the Cubs, Lester will instead enjoy a rate less than half that, thanks to Illinois’ 5 percent flat state income tax.
So even with the $13 million premium the Giants were willing to pay, Lester’s take-home salary in Chicago will be at least $1 million more when factoring in state taxes. That’s more money he could give to his favorite charities. (Since Lester’s battle with lymphoma at 22, he has actively advocated for the pediatric cancer community.) As a free agent, Lester has been quoted saying, “I want to go to a place that appreciates what I do on the field and off the field, as far as with our charitable work, how we represent the team in the community.”
Lester may also have chosen the Cubs for the chance to reunite with two executives who drafted him back in the day for the Red Sox: now-Chicago president Theo Epstein and general manager Jed Hoyer.
The Boston Red Sox made a lower final offer of six years for $135 million after starting with a low-ball $70 million contract that led to his trade to Oakland this past summer. Still, the star pitcher might have had sentimental reasons to head back, since it was with the Red Sox that he took two World Series Championships. But even the Giants’ prestige of having won the World Series three times in the last five seasons wasn’t enough. Lester still chose the Cubs, who in striking contrast haven’t won a World Series in over 100 years.
It’s not likely Lester’s decision hinged entirely on taxes, nor should any major life decision we make. But that doesn’t mean Lester or any of us can afford NOT to know what the tax impact of a particular choice holds. Having this knowledge in hand, regardless of which way we choose to go with a major decision, can help us find other ways to mitigate tax liabilities and preserve income.
In the event of any upcoming life or business change, whether planned or unexpected, consult with an advisor from the Talley & Company team to understand how your tax profile might be affected.