How Florida, Tampa, & Vegas, playing in states with no income taxes have taken advantage of their tax situation to capture four of the last five Stanley Cups.
Introduction
This past July, during the National Hockey League (NHL) free agency period, much was made about the number of players who signed contracts with teams based in states with no or low-income tax rates. Considering the fact that a week earlier the Florida Panthers became the fourth Stanley Cup winner from a no tax state over the past five years, the narrative was that teams from no tax states held an unfair advantage.
With tax season just around the corner, it provides us the opportunity to take a more in depth look at the role taxes play in the NHL.
Ten years ago, I presented a paper at the 2015 MIT Sloan Sports Analytics Conference (SSAC) quantifying the monetary value in after-tax dollars depending on where a player signed a contract and played. The Jock Tax Index (JTI) provided players, teams, and agents a practical way to evaluate how the tax burden for one team compared to another within the league. At the NHL Draft the following year in Buffalo, I was able to sit down with several agents who were interested in using this application to provide their clients the best net deal depending on the tax situation for the team they signed with. Over the next eight years, agents, players, and teams have changed the way they view contracts. Rather than automatically taking the contract that offers the greatest dollar amount, they have started asking: How much is actually going into a player’s bank account? What is the net present value after taxes and considering the time value of money?
In signing a new contract, many variables need to be taken into consideration. Although taxes are never the top priority, achieving the highest value, specifically net after-tax value, is one of many considerations agents and players have increasingly factored in their decision.
In this article I will address the following three questions:
1. Do teams in no tax states have a competitive advantage?
2. Can the advantage that teams in no tax states have be measured?
3. Are there solutions to leveling the playing field when it comes to taxes?
Competitive Advantage
To measure if teams from no income tax states possess a competitive advantage, we compared the percentage of no income tax states in the league to the percentage of these teams making the Stanley Cup Playoffs. The rationale is that the percentage of these teams making the playoffs should be in-line with the percentage they comprise in the league. Over the past seven seasons, these teams have exceeded expectations in making the playoffs.
Currently, there are six teams based in states with no income taxes, the Dallas Stars, Florida Panthers, Nashville Predators, Seattle Kraken, Tampa Bay Lightning, and Vegas Golden Knights. Vegas and Seattle joined the league in 2017 and 2021 respectively. Prior to the 2017 season, these teams represented 13.33% (4/30) of the league’s 30 NHL teams. With the Golden Knights joining the NHL in 2017 this percentage increased to 16.13% (5/31) and with the Kraken the percentage now sits at 18.75% (6/32) of the league’s 32 teams.
As the graph below demonstrates, over the first six years (2012 to 2017 playoffs) of our study, the number of teams in no income tax jurisdictions making the playoffs only once exceeded the percentage of these same teams in the NHL (2016 playoffs as Florida, Tampa, Dallas and Nashville represented 4 of the 16 teams). Since 2018 the trend has changed. Over the past six years the number of teams in no income tax states making the playoffs has consistently exceeded the expected percentage.
Measuring the Net Tax Advantage
The previous section showed that teams based in states with no state tax have exceeded their expected performance when it comes to making the playoffs. In this section, we provide an example of how these teams could use this competitive advantage when competing for a player in the open market.
While teams and representatives can negotiate the total salary of a contract, it’s the net value of a contract that provides the greatest insight in determining the value of each individual contract proposal. Although all players will pay non-resident taxes for away games played in other states, players who play in a state with no income taxes will not have any state liability for their home games. Therefore, there will always be a financial advantage for an athlete to sign and reside in a state with no income taxes.
This past offseason, Sam Reinhart was set to be the top forward on the open market before re-signing with the Florida Panthers on June 30th, 2024. Reinhart’s decision helps illustrate the inherent advantage the Panthers possess. In comparing Reinhart’s signed contract (which had an average annual value (AAV) of $8,625,000) with other potential suitors, we can measure the financial advantage the Panthers had in negotiations. The Utah Hockey Club and the Chicago Blackhawks would have needed to offer over $9,200,000 per year while the Anaheim Ducks and Vancouver Canucks would have both needed to offer over $11,000,000 per year to meet the same net value of the Panthers contract.
Another way to view the advantage the Panthers proposal offered is to compare the after-tax net value of Reinhart’s $8,625,000 AAV to the other potential suitors. In taking into consideration, federal (federal, Medicare and Social Security) and state (both resident and non-resident) taxes, the Panthers net value is $5,166,008.65 which is over $300,000 more than if both Utah and Chicago had offered the same AAV and over $1,100,000 more than Anaheim or Vancouver.
Adjusted Salary Cap
As the previous two sections have indicated, teams based in states with no income tax hold a competitive advantage in the NHL. One way to combat this advantage would be if the new Collective Bargaining Agreement provided an adjusted salary cap based on each team’s tax jurisdiction.
For the 2024-2025 season, an athlete who plays in the NHL will potentially play in 24 US jurisdictions and four additional Canadian provinces. After analyzing each team’s home and away schedule, a team’s unique tax liability can be determined and then translated into a tax adjusted salary cap.
To derive an adjusted salary cap, we divided the current salary cap of $88,000,000 by the maximum number of players allowed on an active roster (23) and calculated the after tax value of that number ($3,826,086.96) for every single team. From there, we took the net value for each individual team and indexed it with the average net value for all teams. This allowed us to adjust each team’s salary cap by multiplying their respective index with the current salary cap in order to provide an adjusted salary cap for each team depending on that team’s unique tax situation. The results are indicated in the following chart.
Chart 1:
Adjusted Salary Cap
Conclusion
Over the past ten years, I have preached the importance of valuing contract proposals by the net after-tax value. Having worked with many agents and players over that time, I’ve seen the receptiveness to this message grow exponentially. Although, many factors need to be taken into consideration when signing a contract, it is important for both players and agents to understand the role taxes play in the actual net value of a contract.
Over the past eight years, NHL teams who play in states with no state income tax have shown a competitive advantage within the league. They have used the fact that they are able to offer contracts at a discount in the open market while still providing the same net value as teams based in states with higher tax liabilities.
Although there are tax planning strategies to lower tax liabilities when signing with any team, signing with a team in a low tax state provides the greatest inherent tax savings opportunities. However, this doesn’t eliminate offers from teams in jurisdictions with higher tax liabilities. In order to make these offers competitive, a premium often times needs to be added in order for these proposals to have the same net after-tax value as those from no to low-tax jurisdictions. Creating an adjusted salary cap specifically tied to that team’s tax situation could potentially offer a solution that could level the playing field.
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