Do you live in a high-tax state? If so, it's not just your wallet that's taking the hit. It may also be hurting your NFL team's chances of reaching the playoffs.
That's because professional football players, like the rest of us want to maximize their take home pay -- and take taxes into account. Those incentives translate into won-loss records and playoff berths for NFL teams, according to a recent paper from the Vienna University of Economics and Business.
For example, teams from California, which taxed top earners more than any other state -- at a rate of 14.1% during the 23-year period spanning from 1994 to 2016 which the study examined – won 2.75 fewer games per year than teams from states with no personal income tax, such as Florida, Texas, Tennessee, or Washington. Overall, teams that failed to make the playoffs in 2016 had an average tax rate of 5.93% – about 30% higher than the rate for playoff participants.
One reason taxes have such a big effect: Unlike other pro sports, the NFL operates with a strict salary cap, meaning that its 32 teams must spend the same amount each season on player salaries. The number is set at $177 million for this season, which works out to an average of about $3.3 million per player for a 53-man roster.
The salary cap is designed to establish a level playing field among the NFL teams, since some teams play in larger markets with bigger fan bases than others. But the salary cap doesn't take into account state tax rates, so it ends up locking in other inequalties. Normally teams in high income tax states, like New York or California, could offset that disadvantage by paying players more. In the NFL's case, the cap precludes that.
The difference can be substantial, according to the study. California's high tax rate means its teams have $347,500 less to spend on player salaries each year than the teams in states with no income tax. It's not hard to see how that might translate into roster quality, says study author Matthias Petutschnig. “A team that has more after-tax money to spend has a higher chance of acquiring the better players.”
Of course, there could be other explanations. Some low tax states -- Texas and Florida -- are simply more gridiron mad than other parts of the country.
Petutschnig doesn't think so.
He highlights the success of teams that relocated to lower-tax states during his observation period: The Browns, for instance, moved from Ohio (tax rate: 7.4%) to Maryland (tax rate: 5.3%) in 1995 when they rebranded as the Baltimore Ravens. On average the Ravens posted a better record by more than 1 game per season following the move, even winning the Super Bowl in 2001. In fact, over the entire sample period from 1994-2016, teams in high-tax states on average won 0.23 fewer games for each percentage point of tax differential, according to the report.
The Trump administration’s tax reform passed last year should further increase the tax gap. The new law places a $10,000 limit on the amount of state and local taxes that individuals can deduct from federal income tax bill.