Price’s Vanderbilt education pays off
David Price won the American League Cy Young Award in 2012, finishing with a 20-5 record and becoming the first AL East pitcher in nearly a decade to claim the league ERA title.
But he scored an even bigger victory just before the end of the year: He beat the fiscal cliff.
Even more intriguingly, he did so in a way that hinted at the possibility of a future trade.
Not long before the clock struck midnight on New Year’s Eve, Price and the Tampa Bay Rays reached agreement on a one-year contract for 2013 worth slightly more than $10 million. The ingenuity of the team and Price’s agent, Bo McKinnis, was in the details.
Price’s contract included an immediate $5 million signing bonus, a 2013 base salary near $1 million, and $4 million in deferred salary payable in 2014.
Why is that breakdown significant? Well, remember what was going on in Washington, DC, at the time? Congress was working to avoid the fiscal cliff.
Eventually, Congress passed the American Taxpayer Relief Act of 2012, which raised the top federal income tax rate from 35 percent to 39.6 percent. That obviously affected Price, who earned more than $4 million in base salary during the 2012 season.
By giving Price $5 million of his new contract right away, before the New Year began, it became income earned in 2012 — under the lower rate. For Price, the end result figures to be a federal income tax savings of roughly $230,000.
When factoring in state taxes and the new Medicare surcharge, one expert said Price’s total savings will amount to $400,000. (While Florida does not have state income tax, the Rays play half of their games on the road, rendering that income taxable.)
Apparently, it’s good to have an agent with a degree from Vanderbilt University’s Owen Graduate School of Management.
There also was a clever wrinkle in this deal for the Rays: the $4 million in 2013 salary that will be deferred until 2014.
Price is one of the best pitchers in baseball, but with each passing day it becomes less likely that the low-budget Rays will be able to sign him to a long-term extension. As evidenced by the trades of James Shields and Matt Garza in recent years, the franchise’s financial model doesn’t seem to permit carrying expensive starting pitchers.
Because Price is set to become a free agent after the 2015 season, the Rays likely will need to trade him in the next 12 months if they want to maximize their return. (Acquiring teams generally want at least two years of control on a player in order to surrender elite prospects.)
So, what’s the significance of that $4 million deferral? Because the Rays won’t pay that money before next winter, the collective bargaining agreement allows them to negotiate a way for Price’s (theoretical) new team to assume that obligation.
In other words, the Rays could deal Price within the next year and end up paying only $6 million of the roughly $10 million he is owed on his 2013 contract.
Just in case you weren’t convinced by three postseason appearances in five years, despite severe payroll disadvantages . . . Rays general manager Andrew Friedman is a very smart man.
Price doesn’t have the biggest contract in baseball. But it’s very possible that he has the smartest.
And it’s fitting: Price is a Vanderbilt guy, too.