Income Taxes and Firm Competitiveness: A Case Study from the National Football League

In the National Football League, teams have been subjected to a salary cap, which has prevented teams from paying players in aggregate over a specified value since 1994. The presence of the salary cap provides a unique setting for understanding how tax rates affect the competitiveness of teams. We use data on National Football League teams from 1984 to 2000 to create a difference-in-differences model to estimate the effect of state income taxes on team performance. We use college football teams, who do not pay salaries to their amateur players, as the control group to identify causal estimates. We find that, in the presence of the salary cap, team quality, as estimated by a Simple Rating System value, is significantly lower in high-tax states, particularly after the passage of the salary cap. Our results are robust to numerous specifications of the control group. We also show using a decision tree analysis that teams in high-tax states were more likely to be above average before the salary cap. However, after the salary cap, teams from high-tax states are less likely to be above average.