Teams from low-tax states have an advantage over teams from high-tax states
Photo by Matias J. Ocner ([email protected])
Every year, in either December or January, I post something along the lines of “Did the Vikings suck this year because of Minnesota’s high taxes?” Indeed, I grade Vikings’ seasons by how early I post the article.
As I wrote in 2021:
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.”
Petutschnig’s explanation of his findings for the NFL may well apply to Hembre’s findings for the MLB, MBA, and NHL. As Zeifmans, a tax, accounting, and consulting firm based in Toronto, explained recently:
The NHL salary cap is the same for all teams, but taxes create disparities in what that cap can buy in after-tax dollars. For example, two teams spending to the $83.5 million cap will offer players very different take-home pay depending on local tax rates. A team in a low-tax state effectively gets more “bang for their buck,” allowing them to assemble stronger rosters within the same spending limit.
For teams in high-tax jurisdictions, this disparity creates a financial squeeze. They may struggle to build equally strong rosters, as a larger share of their salary cap goes toward compensating for tax burdens rather than directly funding player talent.
This tax advantage doesn’t just help attract star players—it also allows teams in low-tax states to stretch their salary cap further, building greater depth and balance. The result? A financial edge that can translate into competitive success.
To illustrate, let’s compare a hypothetical US$4 million annual salary offered by teams in Florida (no state income tax), Ontario, and California (Whyno, S., 2024):
- Florida (e.g., Florida Panthers or Tampa Bay Lightning):
- With no state income tax, players keep more of their earnings. Factoring in federal taxes and other deductions, a player might take home roughly $2.4 million from their $4 million salary.
- Ontario (e.g., Toronto Maple Leafs or Ottawa Senators):
- In Canada, both federal and provincial taxes are applied. In Ontario, players face some of the highest tax rates in the league. After taxes, the same $4 million contract could leave a player with around $2.0 million in take-home pay—a significant reduction compared to Florida.
- California (e.g., Los Angeles Kings, San Jose Sharks or Anaheim Ducks):
- California imposes the highest state income tax rate in the U.S., at 13.3% for high earners. Combined with federal taxes, this means a player’s take-home pay on a $4 million contract could drop to approximately $1.9 million — the lowest among these three examples.
So it was that after the Florida Panthers clinched the Eastern Conference Championship on Wednesday with victory over the Carolina Panthers, NHL on TNT analysts Paul Bissonette and Anson Carter had a brief discussion of state fiscal policy:
“The fact that Florida, not only is it an unbelievable team, an unbelievable market, but the fact that you’re not paying state tax,” [Bissonette] said. “That is an advantage that maybe has to be addressed in the next CBA. That’s a conversation for another day.”
Fellow analyst Anson Carter was not convinced.
“You think so? Really? I mean, nobody was talking about the state tax advantage that Florida and Tampa Bay had when those teams were brutal,” Carter said. “So, why is it gonna be such an issue now? Now they’ve got good teams they can use to their advantage. But 10-15 years ago, no one was saying, ‘Hey, look, these guys have an unfair advantage.”
“Well, I know,” Bissonette replied. “I’m just trying to say that I think we’d be naive to not think there isn’t an advantage.”
As we’ve seen, the evidence suggests that Bissonette is correct.
This is bad news for Minnesotans, whose men’s teams, after the Timberwolves blowout this week, have now gone 126 seasons without either a championship or appearance in a championship game between then. It is a different story for our state’s women’s teams, and congratulations to the Minnesota Frost on their second consecutive Walter Cup win.
