Saturday, May 13, 2017

Why do your sports teams suck? Taxes

Between 1989, when the team entered the N.B.A., and this season, the [Minnesota] Timberwolves have the worst record in the league. ...

In a state synonymous with hockey, neither the Wild nor the Stars (while in Minnesota) has won the Stanley Cup. Same for the Vikings and the Super Bowl. The Twins did win the World Series, but that’s the exception to the losing rule. ...

Minnesota has one of the highest top marginal income tax rates for any state at 9.85 percent. ...

It’s unclear how much professional athletes value these public goods, but the Timberwolves still have to pay extra to offset those taxes. And given the competition under a salary cap, it means Minnesota teams spend almost 10 percent less than teams from Florida or Texas, which have no income tax. This could be enough money to upgrade from an average player to an All-Star.

To test my theory, I gathered data on the outcomes of every professional sports game over the past 40 years as well as data on state and local tax rates each team member faces. I then computed how much taxes predict winning for each league in every year while controlling for other factors such as population, income, franchise age and local amenities (i.e., weather).

Results of the analysis show that 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. ...

Several other factors connect the income tax effect to my theory. Comparing player salary to player value measures provides evidence that 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.

The income tax effect could also be explained if people in low-tax states such as Texas and Florida just enjoy sports more and support their teams more and this translates to more winning. But I found that in college football and basketball, where athletes are not paid and should not care about income tax rates, teams from lower-tax states do not perform better than teams in higher-tax states.
--Erik Hembre, NYT, on the tax elasticity of labor supply