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Income Taxes & Team Success

July 10, 2017 - 11:46am CDT

By Mike Brake

Want to help the Thunder win an NBA championship? Eliminate the state income tax!

Okay, it’s not quite that simple. But a new study by a University of Illinois economist finds a clear correlation between state income tax rates and the winning (or losing) records of professional sports teams.

Dr. Erik Hembre of U of I’s Chicago campus studied the win-loss records of all teams in Major League Baseball, the National Football League, the National Hockey League, and the National Basketball Association between 1977 and 2014. He found an increasingly clear connection between winning and lower (or no) state income tax rates after 1994.

So why would this be the case?

First, even rookies in those four professional sports leagues earn hundreds of thousands of dollars a year, which means that professional athletes almost universally fall into the top income tax brackets. The average salaries range in the $2-4 million category, and all-stars typically earn $15 million or even $20 million per year. Regardless of the state, we can assume that everyone who plays full time in the NBA, NFL, MLB, or NHL is taxed at maximum rates.

Those rates might only seem like an annoyance for someone earning $50,000 or even $100,000 a year, but assess, say, a five percent state income tax rate against a $10 million income and you’re talking about an extra half a million a year in state income taxes.

That’s a significant bite out of anyone’s income.

A second factor is the relatively brief playing careers of most professional athletes. While they may make oodles of money for five or 10 years, rare is the player whose career extends even to two decades. They must earn a lifetime’s worth of wealth in a relatively brief career, and tax rates play an increasingly large role in what they ultimately get to keep.

Having an NBA team in a state with no personal income tax allows owners there to construct teams in a way that is the equivalent of adding one all-star player.

Third, while those four professional sports leagues bind players to their initial teams during their first few years in some way, all allow some form of free agency after a specified number of years. Teams routinely bid for the services of star players, and any competent agent or business manager takes state income tax rates into account when advising his client about which $15 million free agency offer would actually reap the most money—the one from a California team with a 13.3 percent state income tax, or the one from Texas with no state income tax at all.

Dr. Hembre also notes that while some teams might offer a “tax differential” to help offset the amount lost to state taxes, all but MLB are subject to some form of salary caps that limit how much a team can pay in total salaries. So such a differential might not be possible.

But the proof is in the data, and Dr. Hembre is convincing.

Since 1994, he reports, every 10 percent increase in state income tax rates has resulted in an average decline in the number of games won by a professional sports team of at least three percent. That may not sound like much—until one realizes that the difference between a championship team and an also-ran can be as little as one game in an extended season.

Dr. Hembre found the largest win-loss differential in the NBA. Between 1993 and 2015, the 13 teams in the highest-taxed states played in the NBA finals 12 times and won six championships (and most of those were one by one superteam, the Los Angeles Lakers).

During those same years, there were just seven teams from states with no income tax, but they played in the finals 18 times and won 11 titles.

“State income tax rates significantly impact team performance,” he wrote.

In fact, he suggested, having an NBA team in a state with no personal income tax allows owners there to construct teams in a way that is the equivalent of adding one all-star player.

Dr. Hembre says that teams in high-tax states are less likely to pursue the best free agent players for the reasons noted above. They are constrained by the subtle but real combination of high taxes and the impact they have on player salaries and salary caps that limit how much they can offer a free agent.

That is true especially of the NBA, where one all-star caliber player can make a huge difference. It remains true to a lesser extent for the NHL and NFL, but Dr. Hembre found minimal impact for tax rates on Major League Baseball, the only league that does not have an enforced salary cap.

To add some proof, Dr. Hembre also ran the numbers on college basketball teams in high- and low-tax states, but found no connection between tax rates and win-loss records. That’s as one would expect when the key factor is player salaries, which do not exist in college.

Of course, if you asked an individual player what impact state income tax rates might have on where they would choose to play, most would refer you to their agents or business managers. But some professional athletes have said state income tax rates play a role in such decisions.

In 2013, after California raised its top state income tax rate to the nation’s highest at 13.3 percent, professional golfer Phil Mickelson stirred a minor frenzy when he announced that he was considering moving to a no-tax state to escape the California tax burden.

That’s hardly surprising. Forbes lists Mickelson’s 2016 earnings from golf and the many endorsements that go with it at $53 million. In California his state income tax bill would be more than $7 million!

After Mickelson was roundly booed by fans of high tax rates, fellow golfer Tiger Woods admitted that he had moved from California to Florida when he turned professional at least in part because of the comparable tax rates.

And when baseball all-star Torii Hunter left the Los Angeles Angels for the Detroit Tigers he noted the differences in state tax rates—13.3 percent in California and 4.35 percent in Michigan. Hunter also moved his residence to Texas where he would have to pay no state income tax on non-playing endorsement income.

So it is hardly a pipe dream to see a championship in the Thunder’s future in a no-income-tax Oklahoma.

Mike Brake is a journalist and writer who recently authored a centennial history of Putnam City Schools. He served as chief writer for Gov. Frank Keating and for Lt. Gov. and Congresswoman Mary Fallin, and has also served as an adjunct instructor at OSU-OKC.