Businesses have long made decisions on where to locate partly based on taxes and a new study by three university economists now says free agent baseball players do so, too.
Major League Baseball teams in Florida, Texas and Washington benefit from having no state income taxes because they are able to get free agents to accept offers of lower salaries, according to the authors of "Baseball Salaries and State Income Taxes: The 'Home Field Advantage' of Income Taxes on Free Agent Salaries."
Unlike the pre-tax salaries reported in the media, MLB players compare after-tax salaries when considering offers, according to the authors. The study found that differences in state income taxes and local taxes in U.S. cities with MLB teams ranges up to about 10 percent.
"The basic implication of this tax difference is a competitive edge for teams in low-tax areas because they have lower team expenses in signing free agents to contracts that pay the same after-tax wage to players," according to the study.
The study was authored by William Kaempfer, professor of economics, associate vice chancellor for budget and planning and vice provost at the University of Colorado at Boulder; James Alm, professor of economics and dean of the Andrew Young School of Policy Studies at Georgia State University; and Edward Sennoga, professor of economics at Makerere University in Uganda. The study has been submitted to an academic journal for publication.
The authors collected annual salary and performance data on all 372 free agent players between 1995 and 2001 and examined variations among the salaries to investigate how state and local income taxes affected the salaries. They then created a formula that demonstrated the impact of state and local taxes on the players' salaries.
"We find that individuals choosing to play in cities with income taxes must be paid higher pre-tax salaries by an amount that ranges from $150,00 to $300,000," the study found.
For example, a trade involving several players during the winter of 2002-03 involving Florida, Colorado and Atlanta almost fell through in its final stages when Charles Johnson refused to void a no-trade clause in his contract unless he received an additional $1 million to move from Florida to Colorado, the study said.
Five of the 30 Major League Baseball teams have no state or local income taxes: Florida, Tampa Bay, Houston, Texas and Seattle. The states with the highest marginal tax rates paid by players were California at 9.30 percent, Minnesota at 7.85 percent and Ohio at 7.50. Rates for the two Canadian teams, Toronto and then-Montreal, were even higher.
The two teams in this year's World Series are located in states with middle-of-the-pack taxes, the Boston Red Sox at 5 percent and the Colorado Rockies at 4.63 percent.
The salary advantages for low-tax MLB teams also is magnified by the "luxury tax" imposed by MLB in an effort to maintain competitive balance and to slow overall salary growth, the study said. When a team with a total annual payroll passes a specified limit the team must pay an additional tax on all payroll above that amount. The additional tax then is distributed to teams with the lowest payrolls.
"Since clubs in high-tax cities find they must pay more for the same players, the luxury tax distorts in favor of teams in low-tax cities," the study found. The authors estimate that of the $11.2 million in luxury tax paid by the New York Yankees in 2003, as much as $1.2 million was due to higher state income taxes.
While the study doesn't show that free agents are moving to Florida, Texas and Washington in greater numbers, it does demonstrate that teams in higher-tax locations have to pay higher salaries in order to be competitive, Kaempfer said.