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Well, that sucked. The Vikings were well beaten by the 49ers on Saturday and the bottle of Miller High Life – the Champagne of Beers (™) – I keep in anticipation of a Vikings Super Bowl win remains on ice. I’m sure you’ll all have explanations for the latest blow out. And, as a Brit, you’ll know more about it than I will. But one you might not have considered is Minnesota’s high taxes.
Sounds weird? Hear me out.
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.”
For example, California had the highest average tax rate over this period – 11.28% – and its teams won 2.75 games per year less than teams located in Florida, Tennessee, Texas, or Washington, which had no personal income tax. With an average tax rate of 8.58%, Minnesota ranked 2nd. Teams that failed to make the playoffs in 2016 had an average tax rate of 5.93% – about 30% higher than the rate for playoff participants, 4.62%. Minnesota’s average tax rate was a hefty 10.15%.
Why would this matter? To ensure competitiveness, the NFL’s strict salary cap limits 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.
But the salary cap doesn’t take state tax rates into account. A player negotiating with a team in a high income tax state like Minnesota might ask for more money to offset what they will lose in high taxes, but that comes out of the $188 million, 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.
The difference can be substantial. In states with no income tax the $188 million allowed in pay under the salary cap is all take home for the players. In Minnesota, $19 million of it will be swallowed up by state income taxes leaving a pool of just $169 million to offer as take home pay: “A team that has more after-tax money to spend has a higher chance of acquiring the better players” says Petutschnig.
One way of testing these findings is to look at franchises which relocated to lower-tax states during this period. The Cleveland Browns, for example, moved from Ohio (tax rate: 7.4%) to Maryland (tax rate: 5.3%) in 1995, re-branding as the Baltimore Ravens. After the move, the Ravens posted a better record by more than 1 game per season, on average, and won the Super Bowl in 2001, a game the Browns had never even appeared in.
True, the Vikings lost to a team from high tax California this weekend. And, over the 1994-2016, period the most successful team was the New England Patriots from high tax Massachusetts. Research such as this does not say that a team from a high tax state cannot be successful, only that it needs to beat the odds to do so, which the Patriots have been able to do with coaches and players of the caliber of Bill Belichick and Tom Brady.
Minnesota lags national averages on worker productivity, capital per worker, venture capital per worker, and new and young businesses as a share of all businesses and, in our forthcoming report The State of Minnesota’s Economy: 2019, we make the case that Minnesota’s high taxes bear a large share of the blame and contribute to below average economic performance. This research shows that they might also account for our poor performance on the football field.