State income tax matters for sports team performance, Miami Heat edition bet against the Raptors

From Erik Hembre:

State- and local-income tax rates differ across locations, giving low-tax teams a competitive advantage when bidding for players. I investigate the effect of income tax rates on professional team performance between 1977 and 2014 using data from professional baseball, basketball, football, and hockey in the United States. Regressing income tax rates on winning percentage, I find little evidence of income tax effects prior to 1994, but since then a ten percent increase in income taxes is associated with a three percent decline in winning percentage. A robustness check using within state variation in income taxes affirms this result. The income tax rate effect varies by league, with the largest effect in professional basketball, where teams in states without income tax win 4.5 more games each year relative to high-tax states. The income tax effect is smallest in major league baseball, which could be explained by greater team payroll disparity. Placebo tests using college team performance find no evidence of an income tax effect.

The pointer is from the excellent Kevin Lewis.


Many baseball players live in Arizona in the offseason, which has favorable tax treatment...

The favorable tax treatment described has to do with spring training games in Arizona. Where players live in the offseason typically doesn't have an impact on income taxes, because what matters is the state you are in when you are earning the income.

Players have to pay income tax in every state where they play games. The team they sign with matters for taxes because they play half of their games at home.

What if there's additional income besides playing baseball? Sponsorship,investments, image rights?

Good question. I don't know. State of residence may come into play for some of these things.

Doing one's taxes must be a real nightmare for pro athletes, as they may have to fill out a dozen or so state returns, all with different rules.

No problem for players in one of the top leagues, who can afford to just hire somebody, but how about minor leaguers and those who play minor sports?

I think the general rule is that you pay taxes to each state based on income for work performed there (if they have an income tax and if the tax applies to nonresidents), you calculate taxes on all income earned from all sources to your actual state of residence and then, hopefully, your state of residence allows you to claim credits for taxes paid to other states.

However, there are reciprocity agreements among certain states that say someone who is resident of one state but who works in another state (that is party to the agreement) only needs to pay taxes in the state of residence. So, the bottom line is that it is complicated. Having 50 different income tax regimes (plus a few municipal income tax or wage tax regimes) is one of the distinct downsides of federalism.

"The team they sign with matters for taxes because they play half of their games at home."

Personally, I'd try to split income according to 'days with mandatory activities' (e.g., including practices, mini-camps, mandatory marketing events, etc) And not just 'games.'

As I read it, that article actually says that Arizona simply does not tax nonresident athletes for the training days they spend in Arizona. For a state like California, once the state considers you a tax resident, you pay taxes on everything you earn regardless of where you spend your time in the offseason.

Canadian teams also suffer from CDN weakness (USD strength).

Agreed. Plus the study should be called the Raptor effect since they were established in 1995. I think their recent performance would likely mitigate a lot of the results they are finding since they've been pretty good since 2014. (Also high tax Golden Staters have been good recently). I suspect it is pretty coincidental that Spurs, Mavericks and Heat have generally been good over this period, but I wouldn't stretch correlation equals causation here. After all the Orlando Magic are in a super low tax state and have been fairly bad. (Though I guess they had Shaq and then the Stan Van Gundy years). Anyway, I guess my point is that the period studied seems like data mining. I'd love to know the results from 1990-2016. I'll bet the association isn't as strong there.

Teams like the Toronto Raptors pay their players in American dollars so the exchange rate is not a problem. As for taxes, they are not all that different than they would be for players who are in California, Illinois, or New York.

Lower tax rates mean higher effective salary budget. I believe this is diluted somewhat as players are taxed based on where the game is played.

I suppose the Patriots win all those championships because Taxachusetts, I mean Massachusetts, is such a low tax state. In basketball, one or two exceptional players can make the difference between being a champion and an also-ran. Why have the Spurs and the Heat won so many championships? Is it because they are in low tax states, Texas and Florida? With the Heat, the best players were drawn there by Pat Riley. Did Riley move to Miami because it's a low tax state or because of the weather? As for San Antonia, it's known as the "Drive-by City". Is that what attracts great basketball players, so they like to drive by in their very expensive luxury cars? I might point out that the fastest growing states (Texas, Florida, Arizona) are low tax states. Do they have so many sports franchises because they are low tax states or because so many people are moving there? Are so many people moving there because they are low tax states or because that's where jobs are?

Massachusetts is a low income tax state. It has a flat 5.1% income tax, which puts it in the low 30s in a ranking of the states.


As long as you ignore the 12% tax on things like interest income.... and also short term capital gains income.... and the fact that you can't deduct home mortgage interest or charitable donations.... yeah, it's just a low-tax heaven here.


For the purposes of the study, which counted state income tax only, and was discussing athletes, who have very large wage income and relatively small interest and capital income, it is low tax.

You may be correct that overall it has high taxes (and the other states listed by rayward certainly have non income taxes as well) or even high taxes on capital, but that's utterly irrelevant for the article, and thus rayward's point is entirely backwards. As far as this study is concerned, the Patriots' Massachusetts counts as a low income tax state and thus they support the conclusion, rather than contradicting it.

Your reading comprehension seems to be terrible, The Other Jim. No wonder you signed your comment by your other handle, "Moron."

"The income tax effect is smallest in major league baseball, which could be explained by greater team payroll disparity"

Lack of an explicit salary cap (which is related to the latter) seems like it should reduce the effect.

there is also a great example in Euro soccer. Monaco which has a team in the French first division has no taxes and players love it for the salary advantage they get. There are also salary advantages to playing in Russia but the league is disrupted by a long winter lay off because of the weather. I believe Portugal also has some tax advantages.

In theory, this applies not just to professional athletes but anybody who travels for business. However, this seems to be widely ignored (I know a lot of people who travel for business and none who file returns for every state they visit for work). And there is a 'mobile workforce tax simplification act' that's been floating around for a few years:

You generally pay tax on all earned income to your state of residence, correct? If so, travel can only increase your tax burden.

No. In general, if you recognize the days spent in other states and pay income tax to those states, then you're able to deduct that 'out-of-state' income tax on your in-state return.

Small sample sizes, and all that, don't you think? It seems more likely that the NBA shows the largest effect because the Knicks (and their management) are in NY with its city and state income taxes, not that the Knicks (and their management) are bad because they are in NY.

California has a lot of NBA teams

Biggest problem with this is that former Heat star LeBron James maintained his Ohio residency and chose to pay state income tax the entire time he was with the Heat. Betting this is all coincidence, not causation.

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