Your MN sports team lost again? Blame taxes, professor says

Four Minnesota Wild players couldn’t overcome the Minnesota tax system, which scored the winning goal in the first game of their playoffs series earlier this month. Jim Mone | AP

A University of Illinois at Chicago economics professor says Minnesota’s sports woes can be traced to high taxes.

The Washington Post today highlights the work of Dr. Erik Hembre, whose draft paper analyzes teams in the National Basketball Association, National Football League, National Hockey League, and Major League Baseball over the last 40 years. When the workforce is “mobile”, he writes, taxes are a big deal.

“Professional athletes are paid very well and therefore they have large incentives to consider the tax implications of the teams they choose to play for,” Hembre says.

He says if the Timberwolves moved to a low-tax state, it could expect to win almost five more games a year.

The main analysis finds that local income tax rates significantly impact team performance. Since the mid-1990s, a ten percentage point increase in income tax rates is associated with between a 1.9-3.0 percentage point decrease in winning percentage.

Prior to the mid-1990s, the effect was not statistically significant. Estimating the income tax effect separately by league, the effect is greatest in the NBA and smallest in the MLB. Estimating the effect separately by league and year, the magnitude of the income tax effect has grown steadily over the past twenty years in the NBA while remaining relatively constant in the NFL and NHL. The income tax effect is stronger when only state income taxes are considering, implying players may be able to more easily evade local income taxes.

A placebo test using college sports, where players should not respond to income tax rates, instead of professional sports finds no evidence of an income tax on college team performance.

The income tax effect size is non-trivial. In the NBA, if a team moved from Minnesota (a high tax state) to Florida (a low tax state) they could expect to win an additional 4.5 games per year (out of 82). Using the Wins Above Replacement Player statistic developed by Kevin Pelton, this is of a similar value as adding a 2015 version of Marc Gasol or Draymond Green, both are all-star caliber players, in place of a mediocre bench player.3

Conversely, I find only small effects of income taxes in the MLB, where a similar location change would result in winning 1.6 fewer games per year (out if 162). I provide evidence that these differential effects by league are a direct response to variation in average player salaries, payroll variation, and free-agency rules.

Further, I document that teams from higher income tax areas compensate for their disadvantage by not competing as much for free-agents but instead focusing on early-career players on restricted contracts. As a potential by-product of this income tax effect, the NBA has the most disparity in within- and across-season team quality among major sports leagues.

“You get a lot of complaining about professional sports in Minnesota, because this problem is especially acute there,” Hembre tells the Post. “People complain about, ‘Oh, we can’t get good free agents. It really hurts us.'”

He also compared college teams and found there was no comparison between a state’s tax policy and the success of the team. He takes that as at least suggesting there’s a correlation because college athletes aren’t paid.

The effect of taxes under his theory is five times greater for basketball teams than for baseball teams. He says baseball teams lose almost two games a year more in high-tax states. That’s particularly interesting finding given that baseball by its very design is, unlike the three other major leagues, an unlevel playing field in which big markets can outspend little ones, and do with varying results.

He acknowledges more research is necessary, but also reaches a conclusion that many baseball teams have already adopted: Build a team of talented young players who can’t go anywhere, and try to win during a very small window before they become free agents and can head south.

“For the most part, state officials should take [the data] as evidence that income-tax rates don’t hurt their labor markets in general,” Hembre said. “What you see is that income taxes really hurt when a business isn’t able to directly compensate their workers for that extra income tax.”

By the way, Missouri, home of the St. Louis Blues, has a 6 percent top tax rate. Minnesota, home of the Wild, is 9.85 percent.

(h/t: Michael Wells)