If You Want Your Team to Win, Support Lower Taxes

Back in 2018, I shared some academic research on the relationship between state tax rates and the performance of professional football teams.

The main takeaway is that teams based in high-tax states did not win as many games, on average, as teams based in low-tax states.

So if you want your favorite team to win, support better tax policy.

Though there are no guarantees. A team from high-tax California just won the Super Bowl, so it goes without saying that taxes are not the only factor that determines team success.

But it presumably means that teams in states like California and New York have to overcome a built-in disadvantage.

Let’s take a look at some new research on this issue. Professor Erik Hembre of the University of Illinois at Chicago authored a study that’s been published by International Tax and Public Finance.

Here’s the question he wanted to answer.

Do higher state income taxes harm firms? …This paper examines the state income tax burden in a unique market, professional sports, where teams—the capital in question—are highly immobile and players—the labor—are highly mobile to test whether higher state income tax hinders team performance. Anecdotal evidence suggests higher state income taxes disadvantage professional sports teams. Across the four major US sports leagues, of the forty-nine franchises with long championship droughts, only four are from states that do not have an income tax, while twenty are from the highest taxed states.

Here’s his methodology, which takes advantage of the fact that free agency gave players new-found ability to play where they could keep more of their earnings.

To test the link between state income taxes and team performance, this paper analyzes team performance in the four major US professional sports leagues: the National Basketball Association (NBA), the National Football League (NFL), the National Hockey League (NHL), and Major League Baseball (MLB). To address concerns that the association between team performance and income tax rates may be coincidental, I examine how the tax rate effect changed with the adoption of free agency. Achieving free agency has been a milestone for players’ associations, paramount both for increasing player mobility across teams and for forcing teams to compete for player services without restrictions.

Since athletes respond to incentives (just like entrepreneurs, inventors, and scientists), we should not be surprised that Prof. Hembre found that teams in lower-tax states now enjoy more success.

I compare the link between tax rates and team winning percentage before and after the introduction of free agency in each league using within-team variation in top state marginal income tax rates. Prior to free agency, there was a small positive association between income tax rates and winning. After the introduction of free agency, changes in state income tax rates significantly influence team performance. Each percentage point increase in the top marginal income tax rate is associated with a 0.70 percentage point decrease in win percentage. The tax rate effect on team performance is robust to a variety of specifications, such as controlling for sales and property taxes or alternative tax rate measures. Changing the outcome measure to be championships or finals appearances also yields similar results. The estimated effect size is non-trivial. The main analysis effect size of − 0.70 means that a one standard deviation increase in tax rate will result in 2.05 fewer wins over an 82 game season. …Figure 3 presents the annual point estimates (훽2) and 95% confidence intervals of the income tax rate effects between 1980 and 2017. …in all 9 years prior to any league having free agency, there was a positive income tax effect estimate. This relationship changed shortly after the introduction of free agency and since 1990 the annual income tax effect has remained negative.

Here’s the aforementioned Figure 3 for my wonky readers.

As a fan of better tax policy, I like Prof. Hembre’s findings.

As a fan of the New York Yankees, I don’t like his findings

P.S. Here’s one final tidbit that will appeal to fans of the Raiders.

Considering an extreme case, the recent relocation of the Oakland Raiders from a high income tax state (California) to a no income tax state (Nevada) projects a winning percentage increase of 8.6 percentage points or about 1 game per NFL season

P.P.S. I’ll close by reiterating my caveat about taxes being just one piece of the puzzle. After all, I speculated that taxes may have played a role in LeBron James going from Cleveland to Miami many years ago. But he has since migrated to high-tax California. Though many pro athletes have moved away from the not-so-Golden States, so the general points is still accurate.

P.P.P.S. I feel sorry for Cam Newton, who paid a marginal tax rate of nearly 200 percent on his bonus for playing in the 2016 Super Bowl.

P.P.P.P.S. Taxes also impact choices on how often to box and where to box.

P.P.P.P.P.S. Needless to say, these principles also apply in other nations.

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The IRS Commits Unsportsmanlike Conduct against the NFL

I’ve written about how taxes have a big impact on soccer (a quaint game with little or no scoring that Europeans play with their feet).

Taxes affect both the decisions of players and the success of teams.

Grasping and greedy governments also have an impact on football. Especially if teams play in Europe.

…the Los Angeles Chargers and Tennessee Titans traveled across the Atlantic to play a game in London’s Wembley Stadium. …Players spoke of the burdens of traveling so far to play a game, especially the team from California that had to cross eight time zones. Players also spoke out about the tax nightmare they faced when they got to the UK. …players talked ahead of time to their CPAs to determine the tax hit they’d take for the privilege of such a long road trip… Great Britain…levies high taxes on athletes who visit for an athletic match. Teams from California — the Raiders, Chargers, and Rams — already face the highest state income tax in the nation with a top rate of 13.3 percent. Of course, players also have to pay federal income tax. …To top it all off, those players who receive one of their 16 paychecks in London pay a 45 percent tax on a prorated amount based on the number of days they spend in the country. Bottom line: Players on California teams could end up paying 60 percent or more in income taxes for that game check. …For non-resident foreign athletes, HM Revenue and Customs (HMRC) reserves the right to tax not only the income they earn from competing in the match but a portion of any endorsement money they earn worldwide.

No wonder some of the world’s top athletes don’t want to compete in the United Kingdom.

And what about the NFL players, who got hit with a 60 percent tax rate for one game?

Those players are lucky they’re not Cam Newton, who paid a 198.8 percent tax for playing in the 2016 Super Bowl.

Last year’s tax bill also impacts professional football in a negative way. The IRS has decided that sports teams don’t count as “pass-through” businesses, as noted by Accounting Today.

Two major sports franchises might soon be on the auction block following Microsoft Corp. co-founder Paul Allen’s death last week. But a recent Internal Revenue Service rule could cut the teams’ sales prices. Allen died with no heirs and a $26 billion estate, including the National Football League’s Seattle Seahawks… The teams together are worth more than $3 billion, according to the Bloomberg Billionaires Index. …the IRS said in August that team owners would be barred from the write-off — one of the biggest benefits in the law — that allows owners of pass-through entities such as partnerships and limited liability companies to deduct as much as 20 percent of their taxable income. …Arthur Hazlitt, a tax partner at O’Melveny & Myers LLP in New York who provided the tax structure and planning advice for hedge fund manager David Tepper’s acquisition of the Carolina Panthers, estimates the IRS rules could spur potential bidders to offer at least tens of millions of dollars less.

Gee, what a surprise. Higher tax burdens lower the value of income-producing assets.

Something to keep in mind next them there’s a debate on whether we should be double-taxing dividends and capital gains.

Or the death tax.

Let’s close with a report from Bloomberg about some new research about the impact of taxes on team performance.

The 2017 law could put teams in states with high personal income tax rates at a disadvantage when negotiating with free agents thanks to new limits on deductions, including for state and local taxes, according to tax economist Matthias Petutschnig of the Vienna University of Economics and Business. Petutschnig’s research into team performance over more than two decades shows that National Football League franchises based in high-tax states lost more games on average during the regular season compared to teams in low or no-tax states. That’s because of the NFL’s salary cap for teams, according to Petutschnig; if they have to give certain players more money to compensate for higher taxes, it reduces how much they pay other players and lowers the team’s overall talent level. “The new tax law exacerbates my findings and makes it harder for high-tax teams to put together a high-quality roster,” Petutschnig said.

Here’s a chart from the article.

And here are more details.

A player for the Miami Dolphins or Houston Texans, where no state income taxes are levied, “was always going to come out a whole lot better than somebody playing in New York,” said Jerome Glickman, a director at accounting firm Friedman LLP who works with professional athletes. “Now, it’s worse.” …a free agent considering a California team compared to a team in Texas or Florida would need to make 10 percent to 12 percent more to compensate for his state tax bill, said NFL agent Joe Linta… the Raiders — who will eventually move to Las Vegas in no-tax Nevada — have often made the case that unequal tax rates create an uneven playing field. Quarterback Jimmy Garoppolo’s five-year $137.5 million contract with the San Francisco 49ers will mean an additional $3 million tax bill under the new tax law… Garoppolo would have saved $2 million in taxes under the new code had he instead signed with the Denver Broncos in lower-tax Colorado.

By the way, other scholars have reached similar conclusions, so Professor Petutschnig’s research should be viewed as yet another addition to the powerful body of evidence about the harmful effect of punitive tax policy.

P.S. I think nations have the right to tax income earned inside their borders, so I’m not theoretically opposed to the U.K. taxing athletes who earn income on British soil. But I don’t favor punitive rates. And I don’t think the IRS should add injury to injury by then taxing the same income. That lesson even applies to royalty.

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Some Unsolicited Advice for Colin Kaepernick and the NFL Players

I’m a fan of college football rather than the NFL, so I haven’t paid much attention to the controversy over players protesting against police misbehavior during the national anthem.

However, the topic is now trending. The 2018 season’s about to start and Colin Kaepernick is being featured in a new ad campaign for Nike, so I figure why not insert myself into the discussion.

The bottom line is that Kaepernick and the other players have identified a very real and very important issue.

I’ve written on many occasions about the need for better policing.

Though I don’t think the problem is systemic racism or pervasive brutality.

Some of that exists, of course, but I assume the vast majority of cops want to do a good job and treat people fairly (except when giving me traffic tickets).

The real problem is that politicians have enacted far too many laws, many of which don’t make sense or don’t have any victims, and then they expect the police to use those laws to generate more revenue.

This is a recipe for more Eric Garner tragedies.

That being said, NFL players are not going to win the hearts of middle America by actions that can be portrayed as being anti-flag, anti-police, anti-military, and/or anti-country. Heck, they’re playing into Trump’s hands with that approach.

The players would have much more success (both in terms of the issue and with respect to their own popularity) if they portrayed their cause as one that affirms and extends American ideals.

NFL players should come up with some inclusive pro-America slogan about “The Constitution Protects Everyone” or “The Principles of the Founding Fathers Apply to All Americans.” And then they should be ostentatiously patriotic (in the proper sense), standing for the national anthem, with one hand over their hearts and one hand holding both an American flag and some sort or symbol of their campaign.

Trump would have a hard time attacking that kind of approach.

More important, I’m guessing a lot of Americans who heretofore have been rejecting the message of Kaepernick, et al, may start paying attention. And that would be the ideal outcome. After all, the goal should be to change policy, not generate noise and controversy.

For all intents and purposes, I’m suggesting the football players adopt the strategy Martin Luther King used when fighting Jim Crow laws. Dr. King explained that equality of law was an American principle. He embraced the Constitution and Declaration of Independence, even though slavery and other sins meant America was grossly imperfect at that point.

But he wanted an inclusive message. I hope that today’s NFL players copy that approach. Assuming, of course, they actually want better policing and a better America.

P.S. Until and unless there’s a better strategy, Nike will probably suffer the same adverse consequences as Dick’s, which lost customers after kowtowing to the anti-gun crowd. Irritating a big chunk of the buying public is not a wise idea.

P.P.S. I believe in a tough-on-crime approach, but only if laws are just.

P.P.P.S. If you want some cop-related humor, click here, here, and here.

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Let’s Call a Penalty on the NFL’s Anti-Gun Bias

There are certain groups of people who support gun control for very logical reasons.

Criminals are obviously big fans of gun control because they prefer unarmed victims.

Dictators also are big supporters of gun control because they want unarmed subjects.

Other segments of the population like gun control for inexplicable ideological reasons.

International bureaucrats advocate for gun control because they apparently think government should be daddy and citizens should be children.

Foreign politicians impose gun control because…well, I’m not sure why, but probably because they’re weenies.

And some American politicians want gun control because it appears they viscerally oppose individual freedom.

But I’m at a loss to understand why other segments of the population are on the wrong side of the gun issue. Why, for instance, does the National Football League have a policy prohibiting this very simple and innocuous ad from airing during the Super Bowl?

You may be thinking that the NFL simply doesn’t want to get involved in a controversial issue. And I wouldn’t be upset if that was the motivating factor.

But don’t forget that they allowed these two political clowns to appear in this ad during last year’s Super Bowl.

In other words, it’s okay for a couple of hack politicians to peddle anti-Second Amendment nonsense, but the NFL is barring a company from airing an ad designed to sell a legal product.

So what’s going on? I’m guessing the League is barring the ad from Daniel Defense for reasons of political correctness.

But your guess is as good as mine.

If you want more information about this kerfuffle, here’s a video about the controversy from the National Rifle Association.

For what it’s worth, I don’t agree with everything in the video. It’s wrong for the NFL to block the ad, but that doesn’t mean it’s censorship or a violation of the First Amendment. That occurs when government is prohibiting a voice from being heard. When a private entity does it, it’s just empty-headed political correctness.

P.S. Maybe we should be happy the NFL gave Mayor Bloomberg air time. When he gets involved in fights to restrict the Second Amendment, the good guys seem to win.

P.P.S. Here’s my favorite video from the NRA.

P.P.P.S. If you like pro-Second Amendment videos, here’s a great collection.

• Ted Nugent talking about gun ownership and the right of self defense.
• A look at Switzerland’s strong gun culture and the importance of self defense as a protection against oppression.
• And some very powerful testimony to some weasels on Capitol Hill (make sure to pay attention around the 5:00 mark).
• Ice-T talking about the real reason to defend and support the 2nd Amendment.
• A Reason TV video with five facts for Vice President Biden’s task force.
• A look at how a young woman can defend herself.
• Debunking the left’s “black NRA” parody.
• A 15-year old speaking truth to power.

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There Should Be No Role for Government in the NFL Labor Fight

Having just done a blog post where I explained that government should stay neutral in fights between labor and management in the private sector, let’s look at a real-world example to understand why.

The millionaire owners and millionaire players from the National Football League are locked in a labor dispute. This is somewhat understandable since there are ten of millions of dollars of profit available and both sides obviously have an interest in getting the biggest slice of that income.

I don’t care who wins, but government has no role in this squabble (or in discussions about college football championships).

In a free society, people have the right to sign contracts. But freedom also means they have a right to not sign contracts. Indeed, these principle of self-ownership and control over property are key defining characteristic of liberty.

That’s why it is disappointing that the players are trying to get the government to tilt the playing field in their direction. Led by big-name stars (for PR value), the players are going to court in hopes of getting the government to use misguided and coercive antitrust laws to hamstring the negotiating position of owners.

The market should determine the outcome of this dispute, however, not the sordid world of government and politics. The players do not have a right to jobs with NFL teams, just as NFL teams do not have a right to force people into playing football.

Yes, it is a “restraint on trade” for NFL owners to not sign contracts, but it is also a “restraint of trade” for top athletes to choose not to play. But this simply illustrates why antitrust laws are so foolish and so inconsistent with the freedom of contract.

Here’s a blurb from the Associated Press report.

…quarterbacks Tom Brady, Peyton Manning and Drew Brees were among 10 players who sued the NFL in federal court Friday, accusing the league of conspiracy and anticompetitive practices that date back years. Their lawsuit asked the court to prevent a lockout. …They filed a request for an injunction that would keep the NFL and the teams from engaging in a lockout. Invoking the Sherman Act, a federal antitrust statute from 1890 that limits monopolies and restrictions on commerce, the players said they were entitled to triple the amount of any damages they’ve incurred. …The players accused the 32 NFL teams of conspiring to deny their ability to market their services “through a patently unlawful group boycott and price-fixing arrangement or, in the alternative, a unilaterally imposed set of anticompetitive restrictions on player movement, free agency and competitive market freedom.” The collective bargaining agreement with the league was expiring Friday.

One caveat. The title of this post says there is no role for government, but that’s not completely true. The courts have a role as neutral arbiters if there is a dispute about whether one side or the other has failed to live up to the terms of a voluntary contract. Though I suppose my caveat has a caveat since the two sides also could pick a private arbitration service to be the neutral judge of any dispute.

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