As I come across comparatively fewer empirical tax papers than I do for other law-related fields, I was delighted to stumble across Tax Differentials and Team Performance Under the NHL Salary Cap. In it, Martin Higgins (Concordia Univ. - Edmonton) and Mackenzie Frost Common (Alberta) exploit the NHL's adoption of a salary cap after the 2004-05 NHL lockout to assess the competitive implications of tax rate variation. This is not an abstract question as prior research on labor markets and institutional rules in professional sports implies that compensation constraints (e.g., salary caps) may influence competitive outcomes.
The analytic work performed by this natural experiment requires, of course, variation in tax rates. And this assumption is easily met in the NHL context. As the authors note, "differences in tax burdens across NHL jurisdictions can be considerable. For example, a player earning $3 million in a low-tax jurisdiction such as Florida (approximately 36.6% combined marginal tax rate) would retain roughly the same after-tax income as a player earning approximately $4.3 million in a higher-tax jurisdiction such as Quebec, where combined marginal tax rates can approach 56%." These differing tax rates certainly inform NHL free agents' decisions about which teams they might join. And the allocation of free agents, in turn, implicate teams' overall competitiveness.
What the paper finds is that: "tax differentials exhibited limited explanatory power for franchise performance prior to the introduction of the NHL salary cap, but became more strongly associated with team outcomes following the implementation of payroll constraints. The paper's abstract follows.
"This paper examines how salary-cap constraints may alter the relationship between income taxation and team performance in the National Hockey League following the introduction of the 2005 salary cap. While tax differences exhibit limited explanatory power in the pre-cap era, the relationship becomes stronger following the introduction of payroll constraints. The relationship also appears more pronounced when excluding franchises that consistently operated well below the salary cap ceiling. Consistent with the proposed mechanism, teams located in relatively lower-tax jurisdictions appear to exhibit stronger post-cap performance under salary-cap constraints. These findings suggest that salary caps may increase the competitive importance of after-tax income by limiting teams’ ability to offset local tax disadvantages through higher nominal compensation.