Monday, August 02, 2021

Do states with income taxes put their sports teams at a disadvantage?

Some research suggests that. See Another Terrible Thing About Taxes by Erik Hembre. He is an assistant professor of economics at the University of Illinois at Chicago.

Suppose Minnesota has a 10% income tax while Texas has no income tax ("Minnesota has one of the highest top marginal income tax rates for any state at 9.85 percent"). 

If a Texas team offers a player a salary of $1,000,000, how much would a Minnesota team have to offer to match that?

$1,111,111. Why? Because the player will have to pay 10% of his income in taxes. What is 10% of $1,111,111? $111,111.

Then $1,111,111 - $111,111 =  $1,000,000.

That is what the player would make if played for the Texas team. So the Minnesota team has to actually pay more to get the same talent. Professor Hembre shows that teams in states with income taxes win fewer games. He also mentions that if a league has a salary cap, then a team in Minnesota is forced to spend 10% less on player salaries. That is clearly a disadvantage.

Excerpts from the article:

"higher taxes consistently predict worse performance in every league — not just the N.B.A. but also Major League Baseball, the N.H.L., and the N.F.L. over the past 20 years."

"higher-taxed teams in baseball and basketball pay more for players of similar quality, suggesting tax compensation is real. The income tax effect also relies on the assumption that players and teams are responding to income tax rates when negotiating contracts. This explains why the effect arises only in the wake of collective bargaining agreements in the late 1980s and early 1990s that allowed players to become unrestricted free agents and have teams compete to sign them."

No comments: