Stanley Cup pursuit reignites debate about taxes on player salaries

Globe and Mail

2 days ago

There's been a lot of talk in the sports media recently about whether professional athletes prefer to play for teams located in low-tax jurisdictions. The chatter has begun around NHL circles because if you look at the past five Stanley Cup winners (2024: Florida, 2023: Vegas, 2022: Colorado, 2021: Tampa, 2020: Tampa) three of the four teams reside in locations where there's no state income tax.
The NHL has had a salary cap since the 2005-06 season that limits how much each team can spend on player salaries ($88-million for the 2024-25 season) and doesn't account for tax differences between jurisdictions.
There are currently six teams that reside in states with no personal income taxes: Florida Panthers, Tampa Bay Lightning, Dallas Stars, Vegas Golden Knights, Nashville Predators and Seattle Kraken.
Now, the NHL will deny that taxes make a difference when players choose a team. This week, Commissioner Gary Bettman called it 'a ridiculous issue.' In his conversation with some former players on the U.S. TNT television broadcast, he said 'when you played … you wanted to go to a good organization, in a place where you wanted to live … with an owner and an organization, a GM and a coach, that you were comfortable with; and you wanted to have good teammates so you'd have a shot at winning.'
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In some ways, it's hard to argue with Mr. Bettman's comments. There were many years when Florida and Tampa were not very good – and no one was complaining then that their players had an unfair tax advantage. Looking at the NHL standings from this past regular season, Seattle was 27th and Nashville was 30th out of 32 teams.
Nevertheless, the math is interesting. Here's a look at it.
The math
Consider a good NHL player earning US$8-million annually (all figures in U.S. dollars). If he plays in Edmonton, he'll pay $3,811,256 in taxes, keeping just $4,188,744 for himself for an effective tax rate of 47.6 per cent. If he plays in Toronto, he'll pay $4,250,676 in taxes and will keep $3,749,324 for a tax rate of 53.1 per cent. (I've converted the salary to Canadian, calculated the tax, then converted the after-tax number back to U.S. dollars so we can compare to U.S. teams).
Put that same player in a Florida Panthers jersey and he'll pay $2,912,784 in federal (not state) income taxes, plus $196,653 in FICA taxes (which are equivalent to our CPP and EI contributions but are much higher) for a total of $3,109,437, leaving $4,890,563 in his pocket. This is an effective tax rate of 38.9 per cent.
So, a Florida player earning the same $8-million salary will take home $701,819 more every year than an Edmonton Oilers player, and $1,141,239 more than a Toronto Maple Leafs player.
Over a five-year contract, this can be about US$3.5- to US$5.5-million more in the player's pocket after taxes. An extra US$5.5-million invested at 6 per cent annually can provide an annual income to the player for 50 years, starting at age 35, of US$195,000 after taxes annually, indexed to inflation at 2.5 per cent each year. You don't think that can make a difference in a player's decision when these guys have such short careers?
Further, a research paper written by Erik Hembre of the Department of Economics at the University of Illinois at Chicago calculated that a team's winning percentage does in fact decline by about 0.60 per cent with every percentage point increase in income tax rates.
Interestingly, the research showed that the relationship between tax rates and winning didn't exist before free agency. Only after teams competed for players in free agency could players shift the tax burden onto teams.
The ideas
To make things fair, some adjustments should be made to allow for equalization between teams based on taxes. Simply bringing in a system where teams could exceed the salary cap if they pay a luxury tax would help to maintain competitive balance.
The NHL could also start with the hard salary cap figure and apply the highest marginal tax rate in the jurisdiction to the cap so that each team has an equal after-tax salary cap to work with.
For example, take the player earning US$8-million. In Florida, his take home pay would be US$4,890,563. In order for the player in Edmonton to take home the same amount after taxes, his gross salary should be US$9,333,136. Apply this to each player on the roster, add them up, and you'll have a tax-adjusted salary cap.
I'm a Leafs fan. So, I can say (maybe a little tongue-in-cheek) that I'm happy to blame the NHL's bad salary-cap structure, and our government's high tax rates, for the lack of a Stanley Cup since 1967.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at [e-mail].