For the fourth time in six seasons, the Stanley Cup is going to Florida, a state where the only ice is found in people’s drinks.
During the Florida Panthers’ run to the finals, NHL on TNT analyst Paul Bissonette suggested the Sunshine State’s low taxes gave them an unfair edge.
“I think we’d be naive to not think there isn’t an advantage,” said Bissonnette. “That is an advantage that maybe has to be addressed in the next [collective bargaining agreement].”
Not everyone agrees.
Fellow analyst Anson Carter pointed out that few seemed to worry about the supposed tax advantage when Florida’s teams “were brutal,” a point echoed by NHL commissioner Gary Bettman, who called it a “ridiculous issue.”
“When the Florida teams weren’t good, which was for about 17 years, nobody said anything about it,” Bettman said.
How might state taxes impact team performance?
All NHL teams face a salary cap totaling $83.5 million, but that is on gross pay, not net. So, for a team in a state with no income tax, like Florida, every dollar of that — minus federal taxes, which are the same in every state — is take home pay received by the players. By contrast, in jurisdictions with an income tax, like Minnesota, some portion of that $83.5 million goes, not to paying players, but to paying the state government. State income taxes effectively shrink the amount of money teams can offer players.
Zeifmans, a tax, accounting, and consulting firm based in Toronto, gives three examples. In Florida, with no income tax, “[f]actoring in federal taxes and other deductions, a player might take home roughly $2.4 million from their $4 million salary.”
In Canada, which has won the Olympic gold in ice hockey three times since 2000 but no Stanley Cup since 1993, specifically the province of Ontario, “players face some of the highest tax rates in the league. After taxes, the same $4 million contract could leave a player with around $2.0 million in take-home pay.” And in California, which imposes the highest top rate of income tax in the United States, “a player’s take-home pay on a $4 million contract could drop to approximately $1.9 million.”
To match what a Florida team could offer in net pay, a California team would have to offer about $500,000 more in gross pay, shrinking the amount available to offer to other players.
So who is right?
Fortunately, research is available to adjudicate. In a paper titled “State Income Taxes and Team Performance: Do Teams Bear the Burden?,” economist Erik Hembre used results from Major League Baseball (MLB), the National Basketball Association (NBA), the National Football League (NFL), and the National Hockey League (NHL) to investigate “the effect of income tax rates on professional team performance.”
“Regressing income tax rates on winning percentage between 1995 and 2017,” he writes, “I find robust evidence of a negative income tax effect on team performance.”
Three points lend strength to Hembre’s findings. First, looking at college games (where the athletes are unpaid) we would expect to find this effect absent and, indeed, Hembre finds that college teams in low-tax states performed no better than college teams in high-tax states. Second, of the leagues investigated, MLB teams showed the weakest correlation with their states’ tax rates. This, again, is what you would expect: there is no limit on the salaries MLB teams can pay their players, so baseball franchises in high-tax states don’t face the constraint of a salary cap. Third, when Hembre pushed the analysis back to 1977, he found that “the income tax effect only arose after players gained unrestricted free agency, allowing them to shift the income tax burden onto teams.”
Hembre’s findings are consistent with the broader literature on the effects of taxes on migration. A 2020 paper by economists Henrik Kleven, Camille Landais, Mathilde Muñoz, and Stefanie Stantcheva “review[s] a growing empirical literature on the effects of personal taxation on the geographic mobility of people.” The researchers found “growing evidence that taxes can affect the geographic location of people both within and across countries. This migration channel creates another efficiency cost of taxation with which policymakers need to contend when setting tax policy.”
More specifically: “This body of work has shown that certain segments of the labor market, especially high-income workers and professions with little location-specific human capital, may be quite responsive to taxes in their location decisions.”
This shouldn’t be surprising: all taxes are (dis)incentives. The notion that if you tax something you get less of it is uncontroversial in policy terms and is exactly what motivates “sin taxes” on everything from smoking to carbon dioxide emissions. If the principle applies there, it applies elsewhere, including to labor: where you tax it more, you’ll get less.
Of course, taxes are not the only factor that players take into account when deciding who to sign for. Those other factors that Bettman mentions — quality of life more broadly and the franchise itself — also play a big part.
But, in sports, who wins and who loses is often decided by fractions. No factor, however marginal, can be excluded in explaining one team’s success over another. Dismissing the role of taxes completely is as “ridiculous” as saying that they are all that counts.
As a native of the self-proclaimed State of Hockey, it is bad enough losing our population to Florida in the pursuit of lower taxes. Losing the Stanley Cup to Florida? That’s just too much.