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

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)

  • Dan

    If our income tax rate were negative, David Khan would still have passed on Steph Curry.

  • Will

    Interesting hypothesis, I’m sure professional athletes and their agents take the tax rates into account when evaluating an offer from a team. At the same time there are so many variables involved this issue is likely not the main driving factor in the success of a team. Way to go full Freakonomics on this article!

    • I’d love to see a professional athlete’s tax return sometime, particularly since half the games are played (usually) in another state and the athlete has to be pay taxes in that state.

      • Jay Sieling

        That’s the aspect that makes me wonder about the conclusions of this research. On the face of it, the headline appears to say high taxes impede the ability to attract talent – it hurts the labor market. But the study author specifically says it is only in sports – that the study really shows that taxes have very little effect on the overall labor market. Companies have the ability to make offers to account for the tax difference to draw talented workers.

        The tax implications for a pro athlete must be mind boggling. I found this article that gives it an overall run down. Give all the variability, it seems a players place of residence is more important than team affiliation. http://www.bankrate.com/finance/taxes/taxes-cost-professional-athlete.aspx#slide=7

      • Gary F

        It’s messy. And besides NY State tax, if you actually play in NYC, you got that tax too. Throw in some Canadian taxes to confuse it too.

    • Rob

      It’s fascinating to me that a player who is about to sign a $15 million per year contract gets all worried as to whether he’ll have to pay a million or two in taxes, or whether he’ll have to pay a million or two plus a little more in taxes. Either way, he’ll still have more money than god. I like to think that more substantive reasons dictate where a given athlete decides to play.

      • Will

        So would you worry about an extra $5,000/year with a job that pays $80k/year? Not to mention nicer weather…

        • Rob

          Meh. Apples to oranges comparison.

        • Michael

          If everything in my life cost me about 20K a year and the rest is money I can put in the bank and doesn’t affect my standard of living, no I would not worry about paying the government an extra $5,000 a year.

          There is more to how you live then just that salary per year number.

          • The rich care.

            That’s why there’s a Naples, Florida for wealthy Minnesotans.

  • >>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.<<

    But then you'd have to live in Missouri.

    • Gary F

      And I presume most the pro sports players in KC reside on the Kansas side.

      I like MO. I like KC, Springfield, Columbia, Jeff City, but not St Louis.

      • lindblomeagles

        Onan’s right Gary. The Kansas City Chiefs struggle to acquire free agents, and the Saint Louis Rams MOVED back to Los Angeles. They couldn’t attract free agents either. The Kansas City Royals went to the World Series twice with young players, and NEITHER city has an NBA team.

    • lindblomeagles

      Precisely, which is why the Kansas City Chiefs don’t attract big free agents; why the Saint Louis Rams MOVED to Los Angeles, why neither city has an NBA franchise, and why the Saint Louis Blues still don’t have a Stanley Cup. Heck, even the Kansas City Royals went to two World Series with a young team playing in a small window of time. They don’t attract free agents either.

    • Barton

      Where the St Louis Cardinals have won MANY World Series (yes, lifelong fan)… and yet I get still get teased about ’87.

      • They’ve also won a few Super Bowls and most recently, advanced in the NHL playoffs.

        /Wild fan – Also Cubs fan, so, not a big Cardinals fan.

        😉

  • Jerry

    Totally explains those perennial losers: the Los Angeles Lakers.

  • Jeff

    Weather might matter some, just saying.

  • lindblomeagles

    I’m sorry to be blunt, but this Economics Professor is championing Republicans rather than providing great research. The Minnesota Vikings struggled because their QB went down with a surprising knee injury and they still need to find a WR. The Twins play small ball because they, like Kansas City, Oakland, Tampa Bay, and a few other small market baseball teams made decisions back in the 1990s to pay players less money. The Wild weren’t supposed to be this good in 2017, and they underwhelmed just like the Chicago Blackhawks did. The Timberwolves still can’t draft that transcendent Super Star. If this guy was soooo accurate, how does he explain free agents GOING to New York? New York’s tax rate is high too, and the weather there ISN’T all that great.

    • Dan

      “The Timberwolves still can’t draft that transcendent Super Star”

      They did, finally, two years ago. Just need to improve supporting cast and hope other young players mature.

      • And also hope he can learn to play defense.

  • Postal Customer

    What’s Illinois’s tax? Cubs just won the WS. What about perennial losers like the Red Sox, Yankees, LA Dodgers, San Fran Giants? Oh yeah, all those are low-tax states.

    If living in MN means having a bad basketball team, a sport I deeply do not care about, that’s fine with me.

    • jon

      Google says IL has between 6.25 and 9.75 depending on your location.

    • It snowed somewhere today. So there’s no global warming.

  • Rob

    Man, was it taxing to read the findings of that study.

    Next, we’ll be reading the results of a study showing that sports franchises which feature broccoli on their team menus every day have higher winning percentages on average than franchises who only feature broccoli on their team menus every other day. Criminey.

  • Julie Mullin

    Guess the Lynx don’t care about the tax! #girlsrule

    • jon

      They might care more about taxes if they got paid like their male equivalents…

      WNBA salaries top out around $107K, NBA salaries start around $500k.

  • Michelle

    This ties directly into my letter published in the Strib today on the disregard of correlation vs causality in reporting on scientific studies. Where is the evidence? Just because 2 things happen at the same time doesn’t mean one causes the other. Makes me crazy and I am an accountant not a scientist!

    • Which part of his methodology did you find particularly so?

      • Michelle

        So far he has proved correlation which is what a statistical study can do. However he has not proven cause. His placebo is college athletes which is not the same population as pro athletes. Did he actually test a sample of pro athletes to find out why free agents went where they did. If he did, can we show that free agents are the difference in winning or losing teams? Could it be that the actual cause is that the low tax states actually have better coaches that draw better athletes, or that the better athlete’s families live low tax states tempting them back home–there are a plethora of possibilities. His hypothesis might actually turn out to be correct, but as I read it right now it is just that a hypothesis. Don’t get me wrong, I find the idea intriguing, my beef is that these stories run as scientific fact vs the hypotheses that they are.

        • It’s a draft study advocating more research.

          • Michelle

            But the “draft” part gets lost in the details when disseminated to the general public.

  • Jay T. Berken

    Players must be mad that the Super Bowl is in MN this year much less that ’92 one.

  • LifebloodMN

    Nothing about the market forces? The Minnesota pro sports market is a big-small market or a small- big market depending on how you view it. We can usually compete but don’t have the budget to field a championship team unless the stars align. It’s market forces and payroll driven. What a goofy WaPo article. Or should we take it as high state taxes hurts the quality of the labor market and we therefore need to lower taxes?

    • Only MLB pits markets against each other, money wise. NBA, NHL and NFL all have salary caps.

      • LifebloodMN

        you are right, but the ‘market’ also has to do with market share, viewership, the money associated with media contracts, and the appealing nature or the winning tradition of the market. Some markets are more desirable to play in than others. It gets to a bigger point of why we don’t attract top talent or the top talent leaves our state. Also keep in mind the salary cap can be broken if you have enough money to pay the ‘luxury tax’

        • Dan

          If you read the linked draft study, he acknowledges and attempts to control for market size. As to your original post of taxes hurting the quality of the labor market. He argues that the effect is mostly seen in the NBA because of the salary cap. Other employers can increase pay to make up the difference, capped sports teams cannot.

          However. Having watched NBA teams’ management over the years, to suggest the difference is the “tax effect” is a load. Call it the “Khan-Presti effect” or the “Hinkie effect”. For small market teams, getting marquee free agents mostly isn’t going to happen. Many of the marquee free agent moves in history – Durant to Golden State, Shaq to L.A., etc. – were moves to big markets, with high taxes. We can leave LeBron out as a wash. Or Deandre Jordan, agreeing to go to a low tax state and then staying in a high tax state. So clearly, as he acknowledges, the “income tax effect” doesn’t exist for big market teams. So really we’re trying to account for the win/loss delta of small market teams with the quality of free agent role player signings. And the quality of your draft is just way, way more important, because you can lock guys into cheap contracts for long-enough periods. And drafting stars matters way more than that.

          It would indeed take quite a bit “more research” to convince me that drafting Durant, Harden and Westbrook vs. drafting Flynn, Rubio, Corey Brewer, Wes Johnson, etc., has less to do with explaining win/loss differences than an “income tax effect”, with free agent role players.

          TL/DR study is dumb and everyone would be better off ignoring it.