Baseball superstar Shohei Ohtani’s recent 10-year, $700 million contract with Los Angeles Dodgers has brought an interesting tax perspective to light, sparking some to brand him as a ‘tax dodger’ of sorts.
The contract stipulates that Ohtani will only receive $2 million per year until 2033 and, starting in 2034, he would receive $68 million per year for the next decade. This deal serves the duel purpose of allowing the Dodgers to maintain their prolific lineup while avoiding triggering Major League Baseball’s competitive balance tax, or ‘luxury tax’.
However, the deferral of the bulk of Ohtani’s pay, has led to speculation on the potential for a substantial tax loophole. Under federal law, states are disallowed from imposing an income tax on retirement income of a non-resident. Retirement income is more broadly defined than what typically goes to retirees, instead encompassing substantially equal periodic payments that extend for at least a decade or the recipient’s lifetime.
If Ohtani were to leave California after his retirement, his deferred income could effectively escape the 2024 top tier California state tax rate of 14.4%. This legal oversight led California State Controller Malia Cohen to issue a press release calling for changes in federal tax legislation. Cohen expressed concern over the current system promoting tax imbalances and fostering income inequality, urging for caps on deferral for wealthier individuals.
While Ohtani’s situation has raised public awareness of this tax loophole, it remains to be seen how common such scenarios may be. High net worth individuals have infamously moved from high tax states like California and New York, potentially taking advantage of similar structures that allow them to avoid state income taxes.
The specifics and implications of such moves can be complex. For instance, several years ago, large U.S corporations attempted to capitalize on a strategy known as ‘tax inversion’ to lower their projected U.S tax bills. Despite subsequent regulatory checks on such practices rendering them less attractive, the Tax Cuts and Jobs Act’s endorsement of reduced corporate tax and offshore profit tax exemption has nonetheless been significant.
In 2034, Ohtani may choose to stay in California despite the state income ta, should his job require it, or out of personal preference, seeing that he is likely to play his entire career in L.A. Ohtani’s status as a high-profile free agent could even spur the Dodgers to cover potential state income tax on his deferred salary, thereby changing market dynamics for tickets, parking, and Dodger dogs.
In conclusion, Ohtani’s high-profile signing has inadvertently cast a light on a hidden tax law, reigniting discussions on tax reform, even though he himself did not intentionally exploit this loophole. The discourse surrounding his situation could well lead to changes in tax legislation, though it remains to be seen whether Ohtani himself would be affected by the tax.
Last update by Steven Chung stevenchungatl@gmail.com, a tax attorney based in Los Angeles. He can also be reached on Twitter: @stevenchung and LinkedIn: https://www.linkedin.com/in/stevenchung/