Sports Tim Zimmer, Indiana Department of Workforce Development (DWD)

1. Sports Tim Zimmer, Indiana Department of Workforce Development (DWD)

2. Tax Policy and Professional Sports Do State Taxes Influence Performance

3. Background • National Basketball Association • Sports and entertainment enterprise • Annual revenue in excess of $4 billion (5) • Revenue • Tickets • Merchandising • TV • Distribution of Revenue is Governed by the Collective Bargaining Agreement (CBA) • Currently in negotiation • Hard Cap (in relation to many other sports)

4. Background • Salary Cap • CBA (governs split of league revenues) • Cap provides maximum that a NBA franchise can spend on salaries • Salary Cap Helps Mid/Small Market Teams? • Limits large markets • Contributes to parity of play • More exciting games, more exposure, and higher attendance • Higher probability of playoffs • Does it work? • Kaplan, 2004 (3) • Rosen and Sanderson, 2001 (7) • Szymanski and Kesenne, 2004 (9)

5. Background • Salary Cap Emphases Other Incentives • Examine other influences on team success • Do State Taxes Influence NBA Team Success? • Alter incentives in the accumulation of talent • Players • Coaches • Management

6. Variables / Data • 11 Years of NBA Team Performance Data • Team winning percentage • 2000 through 2010 (6) • 11 Years of State Income Tax Data • 2000 through 2010 (10) • Top marginal tax rate included • Canadian team excluded • One team moved, new state tax rates applied • Lagged one period as decisions are make prior to season • Lagged Team Success • Prior success and stable teams • Lagged 3 periods

7. Variables / Data • Coaching Change • Binary for season of coaching change • Lagged Coaching Change • Binary lagged one period • To account for time needed for adoption on new schemes • Lagged Coaching Change • Binary lagged one period • To account for time needed for adoption on new schemes • Yearly Binary Variables

8. Variables / Data • Draft Squared • Drafted players can alter team • 1st pick award 30 points decreasing by 1 for every subsequent pick • Points are then squared • Reflects the non-linear nature of decreasing player ability in the short term • Lagged Draft Squared • Allows for player maturation • Metro Size • 2000 Census (11) • Free agents and the lure of Bright Lights/Big City? • Player Injury • Assumed normally distributed in large sample

9. Variables / Data • Summary Statistics (non binary)

10. Methodology • Ordinary Least Squares (OLS) • Winning Percentage for NBA Team is Estimated Using the Following Model

11. Results Details available on request

12. Results • Year • Insignificant • Lagged Winning Percentage • 1st most significant and positive • 2nd less significant and positive • 3rd significant and negative • Parity and limited window? • Coaching Change • Significant and negative • Lagged coaching insignificant

13. Results • Draft • Insignificant • Lagged insignificant • Metro • Insignificant • State Income Tax • Significant and negative

14. Conclusions • Results Indicate • Prior years are good predictors • With possible parity effects taking hold in third year • Small window of opportunity • Coaching change seen as negative in short term • State Income Taxes Negatively Influence Winning Percentage • Affect a NBA Franchises to acquire ability in Management/Owners, Coaching and Players • If Parity Is Desired Outcome • NBA could adjust individual team salary cap with index to compensate for taxes and/or cost of living • CBA implications

15. Next? • Method Transmission • Management/Owners • Coaching • Players • Through Free Agency? – Choice Modeling • Study concluded with 2010 data • Who made 2011 Finals? • What was the common link?

16. References • Harville, D. (2003). The Selection or Seeding of College Basketball or Football Teams for Postseason Competition. Journal of the American Statistical Association. 98, 17-27. • Kahn, Lawrence M. (Summer, 2000). The Sports Business as a Labor Market Laboratory. The Journal of Economic Perspectives. 14 (3), 75-94. • Kaplan, R. A. (October, 2004). The NBA Luxury Tax Model: A Misguided Regulatory Regime. Columbia Law Review. 104 (6), 1615-1650. • Kendall, T.D. (October, 2003). Spillovers, Complementarities, and Sorting in Labor Markets with an Application to Professional Sports. Southern Economic Journal. 70 (2), 389-402. 5. NBA data website: www.insidehoops.com. • NBA data website: www.basketballreference.com. • Rosen, S. and Sanderson A. (February, 2001). Labour Markets in Professional Sports. The Economic Journal. 111 (469), F47-F68. • Scully, Gerald W. (March, 2004). Player Salary Share and the Distribution of Player Earnings. Managerial and Decision Economics. 25 (2), Sports Economics, 77-86. • Szymanski, S. and Kesenne, S. (March, 2004). Competitive Balance and Gate Revenue Sharing in Team Sports. The Journal of Industrial Economics. 52 (1), 165-177. • Marginal Tax Data: www.taxfoundation.org. • United States Census Data: www.factfinder.census.gov. • Zimmer, Timothy and Kuethe, Todd. (2008). Major Conference Bias and the NCAA Men’s Basketball Tournament. Economics Bulletin. 12 (17), 1-6. • Zodrow, G., and Mieszkowski, P. (1986). Pigou, tiebout, property taxation, and the underprovision of local public goods. Journal of Urban Economics. 19, 356-370.