Shohei Ohtani, one of baseball’s most coveted players, agreed to a $700 million contract with the Los Angeles Dodgers on Saturday, making him the highest-paid player in MLB history. California tax collectors may have weeped with joy upon the news – that is, until they realized that they probably won’t get their hands on much cash from Ohtani at all.
The unique contract stipulates that the Dodgers star will be paid just $2 million annually over the course of the ten year contract. The other $68 million per year will be deferred until his deal is up, paid out from 2034-2043.
Why defer so much money so far into the future? For starters, it’s a big win for the Dodgers; by keeping that cash on hand for now, it enables them sign even more talented players, building out a strong team around Ohtani to maximize their championship potential.
More importantly for Ohtani himself, the deferred compensation structure could ultimately save him up to $90 million in California state income taxes.
Usually, any person who engages in professional work in California is subject to the state 13.3% income tax. A player for the Los Angeles Dodgers, for example, pays California taxes on his earnings, regardless of his place of residency. So, Ohtani will be subject to standard income taxes on the $20 million he receives during his 10 years with the Dodgers – around $2.5 million in total tax payments.
But the 10 year deferral changes the game. Although Ohtani won’t get to enjoy the remaining $680 million until his contract is up, none of that money will be subject to taxes until then, either. Once Ohtani no longer plays for the Dodgers, he could simply become a resident of a no-income-tax state, like Florida, Nevada, or Texas, freeing him from the state income tax burden altogether.
This is all possible thanks to a 1996 federal law, HR-394, that bans states from collecting income taxes on certain deferred compensation plans, including those that are disbursed over 10 years or longer and in roughly equal payments. Simply put, there is nothing that California can do about Ohtani’s decision without a meaningful change in federal tax law.
Remarkably, that law was championed by none other than the late Democrat Senator Harry Reid, who was displeased that Nevadans’ retirement income was being heavily taxed by their former home state of California. Thanks to Senator Reid’s efforts, countless nonresidents and former residents of high-tax blue states everywhere – not to mention Shohei Ohtani and other smart professional sports players, like Bobby Bonilla – can enjoy their retirement and their hard-won earnings in peace.
That’s not to say Ohtani’s $9 million per year in tax savings would make any real difference to California’s spiraling financial situation. The state faces a deficit of $68 billion, despite already imposing the highest income and sales tax rates in the country. In fact, a heavy reliance on the income tax is part of the problem, as such taxes are inherently volatile; indeed, California’s income tax collections are 25% below forecast.
By 2034, Ohtani could have many more options to choose from than the 7 states that currently levy no taxes on income. New Hampshire’s tax on retirement income will disappear by 2025. And at least 10 other states are already jockeying to be the next to eliminate their income tax, too.
But Ohtani is not the only Californian with a way out from the Golden State’s oppressive tax regime. This November, voters will have an opportunity to enshrine a suite of new guardrails against higher taxes by approving the Taxpayer Protection Act, a historic ballot initiative that rivals the legendary Proposition 13. The TPA would require voter approval for any tax hike that passes in Sacramento, among other safeguards, giving Californians substantial new power to push back against their political overlords.
For now, we wish Mr. Ohtani the best of luck in his first game as a Dodger this Thursday.