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Comparing state income taxes and sports teams’ performance

This op ed appeared at Minn Post on February 5th, 2021. 

It’s Super Bowl Sunday this weekend and, once again, the Vikings will be watching it at home. It is also budget season at the state Capitol, with Gov. Tim Walz looking to increase Minnesota’s taxes, already some of the highest in the United States. Are the two related?

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 $198 million this season, an average of $3.7 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 $198 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 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.”

As Minnesota’s legislative session proceeds in St. Paul, questions of tax and spending are to the fore. When considering how much of their residents’ income they are going to try to take in tax, policymakers might want to consider the effect on our state’s long-suffering sports fans.

John Phelan is an economist at the Center of the American Experiment.

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