Did the Vikings lose because of Minnesota’s high taxes (revisited)?
When the Vikings got blown out by the 49ers last month, I asked ‘Did the Vikings lose because of Minnesota’s high taxes?‘ As I explained:
In a recent paper titled ‘Touchdowns, Sacks and Income Tax – How the Taxman decides who wins the Super Bowl‘, economist Matthias Petutschnig from the the Vienna University of Economics and Business looks at a 23-year period from 1994 to 2016. He finds “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.”
Another paper supports this conclusion. In a paper titled ‘State Income Taxes and Team Performance: Do Teams Bear the Burden?‘, 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.
Wedges in action
To see how this might work, look at the NFL which operates a strict salary cap limiting the amount each team can spend on player salaries. The figure was $188 million for this season, which works out to an average of about $3.5 million per player for a 53-man roster. Minnesota and a team from, say, Florida, could offer the same top player the same take home pay, which is what that player would be looking to maximize. But Florida has no state income tax. If the Florida franchise offered, say, $5 million, that is all take home. Minnesota, by contrast, imposes a top rate of state income tax of 9.85%. To match the take home pay offered by the Florida franchise, the Minnesota team would have to offer the player $5,539,950. Essentially, these state income taxes drive a wedge between what teams are paying out of their salary cap and what they can offer players. The higher those taxes, the larger that wedge.
Three points lend strength to Hembre’s findings.
First, looking at college games, where the athletes are unpaid, you would expect to find this effect absent. Indeed, Hembre finds that teams in low tax-states performed no better than college teams in high-tax states.
Second, of the leagues investigated, teams’ records 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 teams can pay their players in the MLB so baseball franchises in high-tax states don’t face the constraint of a salary cap.
And 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.”
More than sports
These findings have resonance beyond the sports field. Hembre concludes:
The findings of this paper should be of interest to economists, policymakers, and sports league officials. For economists and policymakers, professional sports is one of the few markets where labor is more mobile than capital, providing a test to the theory of state income tax incidence. My results validate this theory and lend insights into other markets where labor is more mobile than capital, including the market for physicians, star scientists, and CEOs…Other industries such as healthcare and science may be particularly burdened by increasing state income taxes.
I wrote recently about Minnesota’s net loss of higher income residents to other states, either those who leave or those who bypass our state completely. Sports stars are part of this, but only part.
John Phelan is an economist at the Center of the American Experiment.