Shohei Ohtani’s Contract with the Dodgers Could Come with Bonus of Mostly Avoiding California Taxes

The Associated Press

13:46 JST, December 16, 2023

SACRAMENTO, Calif. (AP) — If $700 million wasn’t enough, Shohei Ohtani’s record-setting contract with the Los Angeles Dodgers could also include a bonus: skipping most of California’s famously high income taxes.

Not even the mighty Dodgers have the power to exempt Ohtani from paying his taxes. But they and the player can control when Ohtani gets paid. The Dodgers will pay Ohtani $20 million over the next decade, when the baseball star will be hitting and, health permitting, pitching for the National League powerhouse.

It’s the decade after that when the Dodgers will really start to pay Ohtani — $68 million per year from 2034-43. Ohtani will turn 40 in 2034, an age when most Major League Baseball players have retired. By then, Ohtani could stop playing baseball and choose not to live in California, potentially avoiding for the bulk of his salary the state’s 13.3% income tax and 1.1% payroll tax for State Disability Insurance.

With 97% of Ohtani’s Dodgers income deferred, it means California — where there is an estimated $68 billion budget deficit this year — will have to wait at least a decade before it can collect taxes on the bulk of his salary, if it can collect at all. California could collect taxes from Ohtani’s significant endorsement deals, assuming Ohtani is a California resident.

It’s impossible to know for sure how much state taxes Ohtani will pay. California law doesn’t let state officials provide information about a single taxpayer. The California Franchise Tax Board — the state agency that collects income taxes — says the amount of income subject to tax payments and the timing of those payments vary depending on the technical details of the contract, which are not publicly available.

But the details of Ohtani’s contract that are publicly known appear to fit nicely within the confines of a federal law that specifically bans states from taxing the retirement incomes of former residents, said Kirk Stark, a law professor at UCLA who specializes in tax law and co-authored a textbook on state and local taxes.

That law, Stark says, applies to deferred compensation arrangements as long as the income is received in substantially equal payments over a period of not less than 10 years. That scenario seems to apply to Ohtani’s contract, meaning he could potentially avoid paying California income taxes were he to live outside of the state once his playing career ends.

“Are they, in fact, doing that? I have no idea. It would require a sort of more granular evaluation of the actual contractual language,” Stark said. “Probably even Ohtani doesn’t even know for sure, other than the lawyers or whoever else was involved in drafting the contract.”

During Thursday’s introductory news conference at Dodger Stadium, Ohtani said he structured the contract to help the Dodgers, not himself. He wants the Dodgers to be free to spend more money on other good players.

Professional athletes’ taxes are also much more complicated than the average taxpayer. In the U.S., people must pay taxes based both on where they live and where they work. That means when the New York Mets play the Dodgers in Los Angeles, Mets players can be taxed for the days they played in California.

Most states have a formula for how to calculate this, known as “jock tax,” according to Jared Walczak, vice president of state projects for the Tax Foundation. It doesn’t apply to states that have no income tax, like Texas, Tennessee and Florida, where many professional athletes move.

Ohtani’s contract highlights the outsized impact California’s wealthy residents have on the state’s finances. Of the state’s more than 39 million residents, only about 8,500 people account for a quarter of the state’s income tax revenue each year. That’s one reason why state budget officials closely monitor the number of companies each year that decide to sell stock to the public — a process that increases the state’s population of millionaires.

“Mr. Ohtani already has and will continue to put up otherworldly numbers on the field, however it is fair to say it will take much more than his remarkable success to close next year’s budget gap,” said H.D. Palmer, spokesman for California’s Department of Finance, said of the state’s estimated multibillion-dollar budget deficit.

The California Center for Jobs and the Economy estimated California could miss out on as much as $98 million in taxes from Ohtani — an estimate based on a lot of assumptions. Brooke Armor, the group’s president, said it would take 317 similar contracts to cover California’s budget deficit.

“That’s a very small number of people, and every time somebody leaves — a high income earner — the budget feels it,” she said. “It just shows the volatility and fragility of the state’s revenue system.”

Chris Hoene, executive director of the California Budget and Policy Center, said it’s only fair for the wealthy to pay more in taxes than people with lower incomes.

“The whole point of California’s tax structure is to say those of you who are benefiting more and are therefore wealthier and have higher incomes should be paying more in taxes than someone who is making the minimum wage,” he said.