When it became clear that the most decorated quarterback in NFL history was hitting the open market, fans of many long-suffering NFL teams allowed themselves to imagine Tom Brady leading their squad to his seventh Super Bowl championship.
Bill Schuette, the former attorney general of Michigan, was one of those fans. He penned a column for the Oakland Press about his Detroit Lions being “on the sideline” of NFL free agency. Why? Because of Michigan’s state income tax.
That’s right: We’re talking about taxes. Brady ultimately signed with the Tampa Bay Buccaneers, who are subject to Florida’s nonexistent state income tax. If Brady choosing a team based on its state’s tax code sounds silly, consider the back-of-the-napkin math: Brady signed a two-year, $50 million contract with Tampa Bay, and Michigan has a 4.25-percent income-tax rate. That’s a difference of $2.125 million! That sure seems like a powerful incentive.
Of course, Schuette isn’t the first to suggest that individual income-tax rates affect sports-team competitiveness. In 2011, Cornell’s Department of Economics published a study in the Journal of Sports Economics that found NBA free agents in the mid-2000s generally performed better after signing with low-tax squads as opposed to high-tax ones.
But do lower state income taxes really lead to stronger teams?
Brady entered the NFL in 2000, which means he’s been in the league for a nice, round number of 20 seasons. Also, his career took off just as the “franchise free-agency” era of stadium-building, relocation and expansion in North America’s four big-money sports settled down. That makes it a natural time frame for examining the relationship between income taxes and winning in pro sports.
But first we need a way to compare state sport success. We started by awarding a state 1 point for one of its teams qualifying for its championship final.1 Then, we awarded 3 points for actually winning a money-sport title. But we didn’t want to unfairly reward states with a lot of teams. For example, though California has the most total championship points with 55, its 16 pro squads over this period were also the most of any state. So we divided total championship points by team-years played to determine the winner of our Championship Cup:
|District of Columbia||8.79||54||6||0.111|
Massachusetts’s spot atop our Championship Cup leaderboard isn’t just thanks to Brady and the Patriots. Despite an average state income-tax rate of 5.26 percent, the Bay State’s three other money-sport teams have each won at least one championship since 2000. In second place? The no-tax state of Nevada, whose new pro sports team (the Vegas Golden Knights) made the Stanley Cup Final in its first year of existence.
As we go down the list, it sure doesn’t look like there’s any connection between average top income-tax rate and competing for sports championships. In fact, a regression test between the two factors showed no significant correlation.2
Of course, playoff systems can be flukey — and some states with only one or two teams would be hard-pressed to win a title in any given window. So we also looked at whether income-tax rates correlate with regular-season win percentages. Across the MLB, NBA, NFL and NHL — the four U.S.-based pro sports leagues3 that feature both multimillion-dollar individual contracts and unrestricted free agency — there was effectively zero correlation.
Why? The thing is, pro athletes don’t do their taxes on the back of a napkin.
Florida might not have any income tax, but the Buccaneers play only half their games at home. Their NFC South division rivals play in Georgia, Louisiana and North Carolina, all of which have higher state income taxes than Brady’s former home base of “Tax-a-chussetts” (as Schuette called it). Because of the “jock tax” in effect in most states and many cities with major sports teams, which levies extra taxes on nonresident athletes and team staff, Brady will have to pay taxes in each of those states, plus all the other states that will host him this season — including Michigan, since the Buccaneers are visiting the Lions this season.
So big-money free agents lock in their chosen teams’ home-state tax rates for only half their game checks.4 Payment for practices occur wherever practices occur, too — including out-of-state training-camp excursions. All of this is before we add in complications of different property-tax rates on “MTV Cribs”-style athlete mansions and athletes not always living full-time in the same state where they play. The web of withholdings, filings and returns is so complex you’d have to be a tax lawyer to figure it all out — and sometimes even they get it wrong!
With so many variables, the effective tax rate a player will pay by signing with one team over another can’t be figured out for any contract longer than a year. And even if there were an obvious tax advantage for a free agent choosing a team, it would still be just one of many factors: the overall size of the offers, the relative quality of the teams, the player’s fit in those teams or the player’s desire to work with a specific coach.
In Brady’s case, he famously took below-market contracts for much of his time with the Patriots. Business Insider estimates that Brady sacrificed between $60 million and $100 million in potential earnings to give the Patriots flexibility within the salary cap. Given that he went to nine Super Bowls and won six in that time, his prioritizing winning over earnings paid off. It’s hard to imagine that Brady would turn around and sign with the Buccaneers just to pocket an extra million or two.
Then there’s the matter of public policy. Michigan is projecting a $3.2 billion budget shortfall because of the COVID-19 pandemic and its associated impacts, and the state had one of the highest unemployment rates in the nation in April. As Schuette wrote, “Rebuilding the economy and providing jobs and paychecks for Americans is far more important than a football game.” But even if there were no emergency and the U.S. economy were thriving, there would still be no evidence that lower state income taxes help pro sports teams win.
CORRECTION (May 28, 2020, 6:07 p.m.): A previous version of the table in this article miscounted the number of championship points for Maryland and Illinois. Maryland has 6 championship points, instead of 2, for 0.100 points per team-year. Illinois has 16 championship points, instead of 7, for 0.162 points per team-year. As a result, the R-squared value of the regression test between income tax rate and championship points was 0.0385 instead of 0.0337.