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Does State Tax impact winning in the NBA?

We recently came across this 2010 paper by Tim Zimmer who was an adjunct professor of economics at Butler University. It was titled “Implications of State Income Tax Policy on NBA Franchise Success: Tax Policy, Professional Sports, and Collective Bargaining” and it essentially looked to answer the question of whether State Tax variances directly impacted winning in the NBA. It concluded that it did, after reading it, we concluded that this was total BS.

NBA players are subject to different levels of State Tax dependent on which state the Franchise they play for is based, this can range from around 13% (California) to 0% (Texas). State Tax in theory gives teams a slight advantage due to the NBA’s salary cap rules, the lack of state tax in some States means players are effectively paid more. However there is no evidence that this has any significant impact on the destination choices of unrestricted free agents when they choose which franchise to sign their next contract with.

We have summarized the papers findings below:

If you’re a fan of an NBA team in a high-tax state, you might want to brace yourself for some bad news. A 2010 paper by economists at the University of Michigan and Stanford University shows that state income tax rates have a significant effect on how well your team performs on the court and, spoiler alert, it’s not good.

The paper, which analyzes data from 2000 to 2010, finds that teams in states with higher top marginal tax rates tend to win fewer games and make fewer playoff appearances than teams in states with lower tax rates. The authors argue that this is because high-tax teams have a harder time attracting and retaining the best players, coaches, and executives, who are crucial for building a successful franchise.

The NBA has a salary cap system that is supposed to level the playing field and prevent big-market teams from hoarding all the talent. The cap limits how much each team can spend on player salaries, and imposes a luxury tax on teams that exceed the threshold. The idea is to increase parity among all 30 teams, regardless of their market size, history or location.

The paper shows that the salary cap system doesn’t account for the tax environment of each team. Players who sign with high-tax teams can end up taking home less money than players who sign with low-tax teams, even if their contracts are identical. The paper claims that this creates a disincentive for players to join or stay with high-tax teams, especially if they have other options in low-tax states. This is the core argument of the paper, one which we aim to dispel any notion of.

The same logic applies to coaches and executives, who also face high tax rates in some states. The paper cites examples of coaches and GMs who left high-tax teams for low-tax teams, such as Phil Jackson (who left the Lakers for the Knicks), Pat Riley (who left the Knicks for the Heat), and Steve Kerr (who left the Suns for the Warriors). Although it is highly debatable this was for tax reasons, with many coaches doing the opposite, including Jackson himself when he went from the Bulls to the Lakers earlier in his career.

The paper estimates that a one percentage point increase in the top marginal tax rate reduces a team’s winning percentage by 0.6 percentage points, and decreases its probability of making the playoffs by 2.5 percentage points. That might not sound like much, but over a decade, the paper believes it will add up.

The paper also controls for other factors that might affect team performance, such as previous records, coaching changes, draft picks, market size, and so on. It claims that none of these factors have as much impact as tax rates do. Coaching changes actually have a negative effect on team performance, suggesting that stability and continuity are important for success. Draft picks have little immediate impact on team performance, and market size doesn’t matter much either.

The paper’s findings have implications not only for the NBA, but also for other professional sports leagues that have similar salary cap systems, such as the NFL and NHL. The authors suggest that these leagues should consider adjusting their cap rules to account for tax differences among teams. One possible solution is to scale the cap based on each team’s tax rate, or to create a tax adjustment index that would equalize the after-tax income of players across teams.

The theory is that this would make it easier for high-tax teams to compete for talent and resources with low-tax teams, and reduce the tax bias that affects team success. It would also make the salary cap system more fair and consistent with its intended goals of promoting parity and competition.

To us at Basketball Noise this seems like a drastic step that the evidence doesn’t suggest at all is needed. Let’s have a look at ways to build teams and whether we think low state tax attracting free agents is a big factor in success.

NBA Team Building: Drafting Players

Professor Zimmers’ paper looks at 11 seasons between 2000 and 2011 and focuses on winning percentage as the best metric for success. We think it’s a classic case of confirmation bias, he believed something, so he created his study to prove it. In the paper ZImmer openly states that drafting players has no impact on a teams winning% (the only metric of success he uses) because it takes them too long to develop, meaning they fall outside of his model. We would suggest that the model isn’t fit for purpose. The San Antonio Spurs play in Texas, where there is 0% state tax. In 1997 they drafted Tim Duncan and paired him with David Robinson, who they had also drafted. In the 1998-1999 season they won their first title. During the studies time frame (2000-2010) the San Antonio Spurs would post a remarkable 70% winning percentage and add 3 more titles to their record (2003, 2005, 2007), continuously adding to their roster through astute draft picks (Manu Ginobilli, Tony Parker) and never signing high profile free agents. To discount drafting players as a major factor contributing to team success is reckless.

At this point let’s list the NBA Champions between 2000 and 2010.

2000Los Angeles LakersCA
2001Los Angeles LakersCA
2002Los Angeles LakersCA
2003San Antonio SpursTX
2004Detroit PistonsMI
2005San Antonio SpursTX
2006Miami HeatFL
2007San Antonio SpursTX
2008Boston CelticsMA
2009Los Angeles LakersCA
2010Los Angeles LakersCA

Of the 11 Champions, 3 were the Tim Duncan Spurs from Texas (0%), 5 were the Lakers from California (13%) and the final 3 were Pistons, Michigan (4.3%) Heat, Florida (0%) and Boston, Massachusetts (5.3%). A healthy looking mix of zero state tax, high state tax and mid level state tax.

From a drafting players point of view, all 5 Lakers titles featured Kobe Bryant who they (essentially) drafted, Boston’s title team featured draftee Paul Pierce, Miami’s title featured draftee Dwyane Wade. The only title winners that didn’t have a Super Star who they had drafted was the Detroit Pistons, standing as an outlier. For anyone who remembers the 2004 Detroit Pistons title, that wasn’t the only way they were an outlier.

Our conclusion, in the Period of this study (and beyond) drafting players is a key way to build a winning NBA franchise. At the very minimum you have them under contract for 4 years and can add an additional 3-5 years with the ability to offer a super-max contract designed to favor the team that drafted (or more technically holds the Bird Rights) to the player.

NBA Team Building: Free Agent Signings

In the study there is a conclusion drawn that free agents prefer to go to places where they can earn more money and that is, apparently at a level that distorts competition, to teams based in states with low State Tax. There is no evidence that the study analyzed what high profile free agents that contribute to winning signed with teams in what States.

By far the biggest free agent deals that took place during this studies time frame were:

  • 2002 – Chauncey Billups to Detroit Pistons (previous team Minnesota Timberwolves)
  • 2004 – Steve Nash to Phoenix Suns (previous team Dallas Mavericks)
  • 2004 – Kobe Bryant re-signed with the Lakers after letting his contract expire

Chauncey Billups moved from Minnesota with a 7.85% State Tax rate to Michigan (4.35%) and immediately impacted winning. Billups led the Pistons to the 2004 title claiming Finals MVP. He had chosen to sign with a Franchise based in a state with a lower tax rate, but not significant enough to have been a huge decision maker for him.

Steve Nash moved from Texas with 0% state tax to Arizona with a 4.54% tax rate, a significant increase. He immediately impacted winning claiming 2x MVPs while with the Suns and narrowly missing out on the NBA Finals on multiple occasions. His key reasons for choosing the Suns seemed to be returning to the franchise that drafted him and linking up with coach Mike D’Antoni.

Kobe Bryant, drafted to the Lakers (via Charlotte) won 3 titles and made the Finals 4 years in a row between 2000 and 2004. California (10.55%) had one of the highest State Taxes in the league at the time. Kobe chose to re-up there and would win 2 more titles, making the Finals multiple more times.

We should mention one (or really 3) final free agent signings that took place just as this study was being published. In the Summer of 2010 Lebron James (Cavs) and Chris Bosh (Raps) both became free agents. They chose to sign in Miami to play for the Heat alongside their young 2006 Finals MVP Dwyane Wade. Wade’s contract was also expiring that summer and he re-signed with the Heat. Miami has a 0% tax rate. These 3 players had multiple options of where they could have signed, a teams free Cap Space being the only limiting factor, but with the option of Sign & Trade contracts they could probably have landed wherever they wanted.

Was it Miami’s lack of State Tax? Was it the weather? The winning pedigree? Heat GM Pat Riley and his famous “rings on the table” move. I guess we’ll never really know. Lebron will finish his career as the richest athlete of all time despite only being the highest paid player for 1 of his, now, 21 seasons in the NBA. Was state tax a factor in “The Decision” probably not.

Our conclusion, while low state tax does in theory give NBA players a slight pay bump, it is unlikely to be a huge deciding factor to the players that really matter, the high paid superstars. They are more interested in living in a city they like, playing for the coach they want or having hand picked superstar team mates. The evidence during the period of this study, doesn’t indicate that major free agents who significantly impacted winning moved to states with lower tax.

Evidence since the study concluded has seen major free agents flock to both California and New York, typically destinations with high state tax. Kevin Durant has chosen both the Warriors of California and the Nets of New York. Lebron James and Anthony Davis have both chosen to play in California for the Lakers. Kawhi and Paul George orchestrated a team up in California for the Clippers.

At the same time, MVP’s such as Embiid (Philly), Giannis (Milwaukee), Curry (Golden State) and Jokic (Denver) have chosen to stay with the teams that drafted them, rather than leave for teams with lower tax rates. 

NBA Team Building: Player Trades

Another tool in the NBA GM’s team building toolkit is the player trade. When we look at this in relation to state taxes there is one important factor to consider. NBA players have a contract with the NBA itself. Unless they have a no trade clause written into their contract, then they don’t really have a say in what team or state they play for if a GM wants to trade them away. Bradley Beal who was traded from the Wizards to the Suns in the summer of 2023 is the only player in the league with a no trade clause at present.

With that said, no GM wants to receive a player who really doesn’t want to be there. So players have increasing power to select their destination, even via trade. We have seen players force their way to specific teams over the years and with increasing regularity. In 2014 Carmelo Anthony couldn’t wait to join the Knicks as a free agent, so he forced a trade from Denver. Anthony Davis did the same in order to join up with Lebron and win the 2020 NBA title with the Lakers. Paul George pushed his way out of OKC to join Kawhi on the Clippers. Harden left Houston to join KD and Kyrie on the Nets and then to join Joel Embiid in Philadelphia. KD himself orchestrated a trade away from the Nets to the Suns.

We say all that to say this… none of those players pushing for trades for even a moment took into account state tax or the impact it would have on their earnings. The majority of them moved to either California or New York, traditionally the home of higher state taxes.

We can see below a table of recent State Tax levels in the US. It hasn’t changed much since the paper was published in 2010.

StateTax Rate
New Jersey10.75%
District of Columbia8.95%
New York8.82%
South Carolina7.00%
West Virginia6.50%
Rhode Island5.99%
North Carolina5.25%
New Mexico4.90%
North Dakota2.90%
South Dakota0.00%
New Hampshire0.00%

This is probably a good time to mention the Jock Tax. Famously introduced after Jordan torched the Lakers in the 1991 NBA Finals. The state of California appeared to take vengeance by levying taxes against Jordan and his Bulls team mates for a portion of their earnings based on them playing/working in the State of California. The state of Illinois responded and soon most States were levying proportional taxes against athletes from all sports who performed away from their home state. You can read about the Jock Tax and its impact in more detail here.

We mention the Jock tax, because in many ways it is a leveler when you consider state taxes. 41 games are played and taxed in your home state. During the NBA Regular Season 41 games are played and taxed in the states of the teams you face on the road. So ultimately any salary based impact of State tax is lessened, although certainly not erased. Interestingly Jock Tax was not even mentioned once in the paper.

What is winning in the NBA?

Another issue we took with the way the study was conducted was its focus on winning percentage. While surely a good measure of overall success, it is not always the goal of NBA teams. The NBA is a draft controlled league, so players entering the league for the first time don’t get to decide where they play. In order to encourage parity, the teams with the worst records each season have the best chance at selecting the best players in the NBA Draft.

With that said, over any 10 year period it is not the norm for a team to post a consistently good winning percentage. Especially with salary constraints, great teams come and go within 2-4 years. Often unable to afford to retain their core role players due to salary cap implications. While some can manage to re-tool on the fly, think Golden State Warriors recent title runs, many have to tear down to rebuild. Spending 1 or 2 seasons with a losing record in order to draft quality assets, either for trade or more longer term team building. 

Teams like Indiana post a relatively good winning percentage, famously frustrating their fans in the last decade by consistently exiting the playoffs in the first round. Never looking likely to win a title, yet never bad enough to “earn” high draft picks that will turn into assets for future success.

Winning in the NBA is reaching the later rounds of the NBA Playoffs. While only 1 team can hoist the championship trophy at the end of the season, 4 teams can make the Conference Finals. Winning percentage on its own is a poor measure of success in the NBA.