A new academic study that concludes professional sports teams in areas with low income taxes outperform those in high tax areas seems, at a glance, ridiculous. The study says this is a truth across all sports leagues, so if that were true, I initially thought the Houston Texans and Dallas Cowboys would play in the Super Bowl every year.
The research comes from a Minnesota-born economist, Erik Hembre, wondering why his state's professional sports teams are usually so bad. His scientific answer? Because Minnesota's high income tax prevents teams from luring star athletes.
"The most straightforward reason why income tax rates might effect team performance is that imposing higher taxes on a mobile labor force is a negotiating disadvantage for high-tax areas, hindering their ability to attract quality players," Hembre says.
There is no real evidence proffered that the problems teams have with signing free agents comes from income tax reasons. There is evidence, thought, that various league salary caps effect that ability (which is why the MLB, with no salary cap, shows nearly no impact due to income taxes). And the implication is that because of capped salaries, teams in high tax income city cannot offer enough money to free agents.
"Further" Hembre writes, "I document that teams from higher income tax areas compensate for their disadvantage by not competing as much for free agents but instead focusing on early-career players on restricted contracts."
The primary focus of the study is the effect on teams in the NBA. And it’s that focus on the NBA that also brings to the forefront the primary problem with the study, because one of the most successful NBA franchises is a team that plays in a no income tax yet operates like a team in a high income state.
The San Antonio Spurs have leveraged smart drafting and smart trading to build the team that has won the most professional titles in the state of Texas over the past 20 years. It's a team that saw David Robinson and Sean Elliott give way to Tim Duncan, who was joined by Tony Parker and Manu Ginolibi. Kahwi Leonard was acquired in a draft day trade with the Indiana Pacers. This is also a team that has made the playoffs in 24 of the last 25 years.
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The Spurs have some free agents this season, primarily an aging Pau Gasol and the sometimes inconsistent LaMarcus Aldridge. But the team's focus has been on the draft and finding hidden gems like Jonathon Simmons. So the New York Knicks might have a tax disadvantage, but there should be nothing keeping the team from operating and succeeding like the Spurs, a team that is run like it has to deal with the so-called tax disadvantage. Then again, fans can only imagine how bad of shape the Spurs would be in if the team was owned by James Dolan, and Isiah Thomas and Phil Jackson kept being put in charge of the franchise.
And the low income tax advantage didn't help the Oklahoma City Thunder keep Kevin Durant from signing with the high income tax Golden State Warriors, and it certainly didn't keep them from being fleeced by Daryl Morey in the James Harden trade. Taxes or no taxes, smart teams will always find ways to win and compete while bad teams always seek excuses and attempt to put the blame on things like taxes instead of ineptness.
Smart teams find ways to get around problems like this income taxes. And as the Rockets proved with the attempted teaming up of Dwight Howard and James Harden, having lots of money to give to a big free agent is meaningless if the free agent just doesn’t fit with what the team wants to do or if there is a personality clash between the key players — like longtime NBA fans might remember back in the late 1970s when the Philadelphia 76ers learned it didn’t matter how many free agents a team bought in or traded for if there weren’t enough basketballs to be shared at one time by Julius Erving, World B. Free, George McGinnis and Darryl Dawkins.
Hembre makes a valid point in that the salary caps should probably be adjusted to cover post-tax income and not pre-tax income. But his study just doesn’t prove that income taxes are the big differences between winning and losing teams. Not as long as the Spurs are operating like a team based in a high income tax state and still winning games, and not as long as the Warriors are signing free agents from low income tax states.