Shohei Ohtani will avoid paying an estimated $90 million in California state income taxes as a result of deferring nearly all of his record-setting $700 million contract with the Los Angeles Dodgers. Now California lawmakers are pushing to change the federal tax code to prevent Ohtani’s contract structure from becoming standardized among high earners in baseball and beyond.
State Senator Josh Becker introduced legislation on Wednesday that urges the U.S. Congress “to establish a reasonable cap on deferred compensation.” Senate Joint Resolution No. 14 passed a Revenue and Tax Committee vote 6-1. The next step for the resolution, which was sponsored by State Controller Malia Cohen, will be discussion and a vote on the State Senate floor in the coming weeks.
“Ultimately, this is about fairness,” Becker said in a phone interview. “This is earned income. This is not retirement income. This is income that is earned here and should be taxed here. It wasn’t what the federal tax code was meant to contemplate. It’s a massive hidden-ball trick.”
Ohtani is accepting annual payments of just $2 million from the Dodgers over the life of his 10-year contract — a structure that Ohtani and his representatives said they proposed because it gives the club greater financial flexibility to continue to make major investments in other star players. But deferring $680 million of his $700 million contract also sets up Ohtani to avoid paying state taxes on the deferred amounts if he no longer resides in the state of California. Ohtani presumably would return to Japan upon the conclusion of his contract.
The federal tax code was altered in 1996 when Congress passed legislation that bars states from taxing deferred compensation on out-of-state residents when their payments are made in equal periodic amounts over at least 10 years. Those laws were designed to protect pension income, Becker said.
“The amounts being discussed were $30,000, then $100,000, and at some point, it became unlimited,” Becker said.
Ohtani’s contract structure is viewed as unique and not likely to be duplicated across the industry because the two-way star’s income streams from endorsements are unrivaled among major league players. For high earners outside baseball, though, the contract sets a potential precedent in a state whose top tax rate of 13.3 percent is among the highest in the nation.
“That is my concern,” said Becker, who represents the 13th Senate District covering portions of Santa Clara and San Mateo counties — areas that include much of Silicon Valley’s immense tech wealth. “It’s certainly a precedent for athletes but also could be used by executives to structure their compensation.”
Because high earners would have to establish out-of-state residency to avoid paying taxes on deferred amounts, Becker said the current tax code encourages people like Ohtani to leave the state.
“We should encourage people to stay here, which I believe this actually does,” Becker said.
Although the state cannot change federal tax law, Becker said he hoped introducing the resolution would bring awareness to the issue while also inspiring discussion and contemplation about creative ways the state could seek to tax deferred money.
“There might be ways we could go after this income without changes to the tax code,” Becker said. “Congress created this position and put us in the hole for this revenue but they can rectify the situation.
“We’re talking about over $90 million that could be going to state programs. This is money that is earned here. It should be taxed here.”
(Photo: Michael Reaves / Getty Images)
