State Taxes and Sporting Performance: The evidence

The Minnesota Vikings’ season was effectively over before my Christmas tree came down. The state’s sports journalists are donning their gloves and sharpening their scalpels, preparing to conduct the annual autopsy. The Vikings suffered from some negative exogenous shocks, to be sure, primarily the loss of quarterback Kirk Cousins. But such persistent failure suggests a persistent malady. Two pieces of research suggest that the Gopher State’s high taxes might be a factor. 

In a 2018 paper titled ‘Touchdowns, Sacks and Income Tax – How the Taxman decides who wins the Super Bowl’, economist Matthias Petutschnig looked at data for a 23-year period from 1994 to 2016 and found “a significant negative relation between the amount of the net (after-tax) salary cap represented by the personal income tax rate of the teams’ home states and the success of the teams.”

Why would tax rates matter for results? The NFL’s salary cap limits what each team can spend on player salaries. The cap is $225 million this season, an average of $4.2 million per player for a 53-man roster.

But that is gross pay; it doesn’t take state income taxes into account. In higher tax states, like Minnesota, a greater share of that gross income is swallowed up by state taxes than in a lower tax state like Florida. So, to offer the same net pay as a Florida team, a Minnesota team must offer higher gross pay. But that comes out of the $225 million cap, reducing the amount available to attract other players: “This reduces the average talent level of the whole roster of a team in a high tax state and diminishes its chances of winning,” Petutschnig says. 

Another 2018 paper supports this finding. ‘State Income Taxes and Team Performance: Do Teams Bear the Burden?’ by economist Erik Hembre investigates “the effect of income tax rates on professional team performance using data from professional baseball, basketball, football, and hockey leagues.” “Regressing income tax rates on winning percentage between 1995 and 2017,” he writes, “I find robust evidence of a negative income tax effect on team performance.”

Three points lend strength to Hembre’s findings. First, looking at college games, where the athletes are unpaid, we would expect to find this effect absent and, indeed, Hembre finds that college teams in low tax-states performed no better than college teams in high-tax states. Second, of the leagues investigated, teams’ results were the least correlated with their states’ tax rates in baseball. This, again, is what you would expect: There is no limit on the salaries MLB teams can pay their players so baseball franchises in high-tax states don’t face the constraint of a salary cap. Third, when Hembre pushed the analysis back to 1977, he finds that “the income tax effect only arose after players gained unrestricted free agency, allowing them to shift the income tax burden on to teams.”

We know anecdotally that taxes are a factor in the location decisions of top players. The evidence presented in these two papers seems to bear that out. Sadly, given the state government’s $10 billion tax hike in the most recent legislative session, the legendary suffering of Minnesota’s sports fans looks set to continue. 

 


READER COMMENTS

MarkW
Jan 8 2024 at 1:46pm

See also the huge contract Shohei Otani signed with the Dodgers.  It is pretty clearly structured to evade high CA income taxes:

But the details of Ohtani’s contract that are publicly known appear to fit nicely within the confines of a federal law that specifically bans states from taxing the retirement incomes of former residents, said Kirk Stark, a law professor at UCLA who specializes in tax law and co-authored a textbook on state and local taxes.

That law, Stark says, applies to deferred compensation arrangements as long as the income is received in substantially equal payments over a period of not less than 10 years. That scenario seems to apply to Ohtani’s contract, meaning he could potentially avoid paying California income taxes were he to live outside of the state once his playing career ends.

 

David Seltzer
Jan 8 2024 at 6:03pm

Mark, I suspect paying taxes in Canada and the US partially influenced Otani’s decision to not play for the Toronto Blue Jays ,assuming they were willing to match the Dodgers bid. It would be an interesting study to see if the Jay’s have signed fewer free-agents than American teams when considering a player’s dual taxation status in Canada.

Thomas L Hutcheson
Jan 9 2024 at 9:49am

I agree.  Tax progressivity should be left to the Federal government where the dead-weigh loss is less.

Matthias
Jan 12 2024 at 9:00am

Why is that loss less with the federal government?

steve
Jan 9 2024 at 5:10pm

Count me dubious. Pretty sure that the Patriots are in MA and they have high taxes. Yankees are in NY. Dodgers are in LA. Celtics are in MA, Lakers in LA, Warriors in CA. If there is an association it is weak and its probably influenced by the Jets, Mets and Knicks being so awful for so long. College football has been owned by the SEC before and after they paid players. This year is an anomaly, but not from a low tax state. (If you think money is an incentive remember endorsements.

 

 

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Steve

another steve
Jan 9 2024 at 5:46pm

Yeah, this one doesn’t even pass the smell test.   Unrestricted free agency (where state taxes would be relevant) is still a very minor part of talent acquisition for teams.  Teams acquire the bulk of their players through a draft, for which state taxes are not relevant.  And regardless, there certainly are no shortage of big name players signing with large market teams (which are mostly located in high-tax states).

Also, the state tax effect is not as significant as it may seem as well, as players pay taxes to the states they play on the road.

I also agree that the sorry state of most New York teams probably skews the data signficantly.

MarkW
Jan 10 2024 at 8:10am

All things being equal, of course large market teams (in New York and California) have a major advantages.  The teams earn much more from ticket sales and local media contracts and players have greater opportunities for outside appearance and endorsement deals.  So you have to look for teams ‘punching above their weight’ and the reverse.

Dylan
Jan 10 2024 at 9:36am

It’s an interesting finding that intuitively makes sense. Like Steve, I’ve got some skepticism but that is probably because the only sport I’ve ever followed it baseball, and my Mariners seem unable to bring home a pennant despite being in a no income tax state.

I’m curious though how this reconciles with Scott’s post on the frequent bankruptcies among professional athletes shortly after ending their careers? This result implies a fairly high level of sophistication among players (or at least their agents) on where they sign. I would have thought things like the attractiveness of the city or things like playing for your hometown team would have made a bigger difference in where a player chooses to play.

Matthias
Jan 12 2024 at 9:02am

Interesting paper!

It always amuses me that the supposedly more socialist Europeans would look at you funny, if you proposed salary caps for their beloved football players, but Americans take these caps for granted for many of their peculiar sports.

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