Professional athletes are both highly paid and highly mobile workers. Previous research has shown that athletes respond to state income taxes differentials through bargaining and migration. If athletes are compensated for state tax burden, teams located in higher taxed states may be at a competitive disadvantage. I examine the effect of state income taxes on professional sports team performance. Using within-team variation in state top marginal income tax rates, I show that, only after the availability of free agency, did state income tax increases lower team winning percentages. I find that for each percentage point increase in state income tax rates, team winning declines by 0.70 percentage points.
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Nine states have no income tax. I use the nine states with the highest top marginal income tax rate for the comparison group. A long championship drought is defined as 25 years or longer; the analysis includes US teams only. The list of teams with long droughts is drawn from https://www.businessinsider.com/longest-championship-droughts-pro-sports-2017-8.
Technically, Moretti and Wilson (2017) utilize the average tax rate of an earner in the 99th percentile as opposed to the top marginal tax rate, but note that these two measures well approximate each other. Similar to my empirical strategy, the main specification in Moretti and Wilson (2017) does not consider sales and property tax burden in the location decision, although robustness checks confirm that inclusion of sales and property tax rates do not affect results.
While all leagues currently allow unrestricted free agency, each league has its own rules governing which players are eligible for free agency. Unrestricted free agency is typically earned after several years of play.
Both the NBA and the NHL play 82-game seasons. MLB plays a 162-game season, and the NFL plays a 16-game season. Full sample tax rate standard deviation is 3.58.
Note that unrestricted free agency is typically only available to players after an initial, restricted rookie contract is completed.
The NHL uses a points system instead of wins and losses, so winning percentage for NHL teams is derived by taking each team’s season points and dividing them by the NHL average points for the year. The NHL awards two points for a win, one point for an overtime loss, and one point for a tie.
The standard deviation of 15.66 sets the NBA as a benchmark. The MLB win percentage standard deviation is 7.1, the NHL is 20.7, and the NFL is 19.5.
Beginning in 1980 allows inclusion of teams from both the ABA-NBA and the NHL-WHA mergers.
Prior work in NFL free agency effects such as Lee (2010), Leeds and Kowalewski (2001), and Larsen et al. (2006) similarly focus on 1993. Zimbalist (2002) cites 1995 as the first year of unrestricted free agency in the NHL. MLB unrestricted free agency officially began in 1976. I use 1988 due to collusion cases that were brought, and won, by players between 1985 and 1987. Tom Chambers became the first NBA free agent signing with the Phoenix Suns in 1988.
Appendix Table 10 displays an analogous table using team-by-state fixed effects and standard errors. Results are quite similar to team fixed-effects model.
Specifically, for a married household earning $1,500,000.
These now include the Las Vegas Raiders (2020), Las Vegas Knights (2017), Houston Texans (2002), Memphis Grizzlies (2000), Tampa Bay Rays (1998), Florida Marlins (1993), and Florida Panthers (1993).
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The author would like to thank the editor, two anonymous referees, experts at The Tax Institute at H&R Block and The Tax Foundation, and UIC seminar participants for valuable discussions, feedback, and suggestions.
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Hembre, E. State income taxes and team performance. Int Tax Public Finance (2021). https://doi.org/10.1007/s10797-021-09685-y
- Income tax
- Tax incidence