Off-The-Cuff

May is here and we’re gearing up for another summer. Hope all is going well with you. Here, in this issue, I feature a slam-dunk of a column that examines the effect personal state income taxes could be having on—of all things—National Basketball Association team records and top-tier Minnesota corporations acquiring the best talent. Buckle your seat belts and away we go….

About a year ago, I saved a PalmBeachPost.com article discussing possible reasons why NBA human tattoo canvas LeBron James would choose signing with the Miami Heat (which he did) over other NBA squads, including his hometown Cleveland Cavaliers. What grabbed my attention recently was re-reading this sentence from that Palm Beach Post column: “If James signs a deal (with the Heat) totaling $96 million over five years, his state income taxes would range from nothing with the Heat to nearly $2.9 million with the Chicago Bulls, roughly $8.6 million with the New York Knicks or New Jersey Nets and $10 million with the Los Angeles Clippers.”

Prior to reading this, I had never thought about state income taxes playing a role in any professional athlete’s signing decision. But what a sumo wrestler-sized difference this was—James could take home an additional $10 million over five years inking with a Florida versus a California team. Florida doesn’t have a personal state income tax.

I don’t know about you, but to me $10 million seems a lot. With that much extra, for example, James easily could pay for 50 needy inner-city high school students to attend a leafy college like Gustavus Adolphus over four years. More likely though, I can see that $10 million helping James buy 41 new Rolls Royce Ghosts at $246,500 each—one for each home game in a typical NBA season…..

After musing over what most Americans, including LeBron James, would do for $10 million—some literally would die for it—I figured I ought to be able to find a significant difference between the abilities of NBA teams in no-tax and highest-tax states to lure top talent and also their abilities to field winning basketball teams. It seemed no-tax state teams should have better players and win more games.

So I went looking. Nine states don’t have any personal state income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, New Hampshire, and Tennessee. As a good comparison group, I chose the nine states (including the District of Columbia) with the highest upper-tier personal income tax rates: Hawaii, Oregon, California, Iowa, New Jersey, New York, Vermont, Maine, and Washington D.C.

The no-tax states currently have five NBA teams: the Miami Heat, Orlando Magic, Dallas Mavericks, Houston Rockets, and San Antonio Spurs. The no-taxers had a sixth team, Seattle, which moved after the 2008 season. The highest-tax states have seven teams: the Portland Trailblazers, New York Knicks, New Jersey Nets, Golden State Warriors, Sacramento Kings, Los Angeles Clippers, and Los Angeles Lakers.

I compared won-loss records of no-tax and highest-tax state teams from 2002-11 and the results seemed to confirm my hypotheses. It would appear that no-tax state teams are able to lure better talent and have better teams. Teams in no-tax states won on average 47.9 games a year from 2002-11; teams in the highest-tax states won only 38.7 games. The NBA average from 2002-11 was 41. In only one year, 2004, did high-tax teams garner more wins on average, 43 to 42. If I hadn’t included Washington D.C. and instead used the next state down on the high-tax list, #10 Minnesota, the teams in highest-tax states would have fared even worse…..

Next, I went about trying to learn if no-tax state teams had a higher percentage of the NBA’s best players. To define “best,” I used a relatively simple measure: scoring average per game. Applying this to the 2010-11 season, I found six of the NBA’s Top 20 scorers played on teams in no-tax states, which represented exactly 30 percent of the league total. Yet the teams these players played on made up only 16 percent of the league total. Those six, no-tax-state stars were LeBron James, Dwight Howard, Dirk Nowitzki, Tony Parker, Chris Bosh, and Kevin Martin.

Another measure of no-tax teams displaying an apparent advantage: the five teams in no-tax states have won five of the last ten NBA championships—Dallas (‘11) San Antonio (‘03, ‘05, and ‘07), and Miami (‘06)—even though, again, making up only 16 percent of all NBA teams…..

Assuming an advantage does exist in the NBA and all this wasn’t purely coincidental, I figured such an advantage probably wouldn’t carry over to Major League Baseball. That sport uses a “luxury tax” that opens the door for high-tax state teams, such as the New York Yankees and Los Angeles Angels, to expand their payrolls far beyond those of smaller market teams in order to make up for players having to pay higher taxes. So I didn’t even analyze Major League Baseball because the situation was similar to comparing apples and oranges.

As for the NFL, which like the NBA has a salary cap, I thoroughly expected no-tax teams would have better won-loss records. However, my analysis involving the 2002-11 seasons showed no difference at all. In part, I attributed this to the relative importance the highest-paid players have on each sport. For instance, an elite NBA player makes up 20 percent of his team’s starting five and is on the floor about 85 percent of the time. In comparison, an elite NFL player makes up about five percent of his team’s starters and is on the field perhaps 45 percent of the time. It seems logical that the best NBA players have a much greater influence over an NBA game than the best NFL players over an NFL game…..

All this set my mental gears spinning: If teams in no-tax states have been signing a greater percentage of the best players and dominating the NBA because of it, wouldn’t it be logical also to assume these same no-tax states have been luring away our nation’s best corporate executives, i.e., the ones with the necessary intellect, steamroller drive, and industry knowledge to grow a business and create jobs? Let’s say a top CEO has identical job offers of $500,000 from competing companies in Minnesota and Texas. If the CEO chooses Texas, he/she takes home about $40,000 more every year. Which job offer would you choose? What could you buy with $40,000?….

That’s it for now. Thanks for reading southern Minnesota’s first and only locally owned business magazine since 1994, the only one reaching 8,400 business decision makers in nine counties. See you next issue.