Japanese pitcher and freshly minted Dodgers team member Shohei Ohtani’s decade-long $700 million contract with the team — already a subject of interest in the sports and tax worlds for its structure — has now drawn the ire of California’s controller.
In a January 8 statement, State Controller Malia M. Cohen (D) argued that the contract underscores deficiencies with U.S. tax policies and urged federal lawmakers to consider reforms.
Ohtani’s contract is notable in that the player will receive just $2 million per year in actual payments from the contract through 2033, with the remaining $68 million of the annual $70 million in pay deferred. That could ultimately save Ohtani as much as $98 million in California taxes over the life of the contract, according to a December 14 report by the California Business Roundtable’s California Center for Jobs and the Economy. That’s assuming Ohtani ceases to be a resident of California on or before the end date of the contract.
In her statement, Cohen’s office noted that Ohtani “could potentially return to Japan and escape payment of California state income taxes on the deferred amount.”
“The current tax system allows for unlimited deferrals for those fortunate enough to be in the highest tax brackets, creating a significant imbalance in the tax structure,” Cohen said. “The absence of reasonable caps on deferral for the wealthiest individuals exacerbates income inequality and hinders the fair distribution of taxes.”
“I would urge Congress to take immediate and decisive action to rectify this imbalance,” Cohen said, arguing that limiting deductions and exemptions for high-income earners would be socially responsible and would contribute to “a tax system that is just and beneficial for all.”
The controller’s comments come after the contract has been scrutinized by the sports, business, and tax press for its unusual and apparently tax-planning-focused structure. The report by the California Center for Jobs and the Economy analyzed the contract partly in the context of California’s highly progressive income tax structure, of which the business roundtable is a critic.
According to the report, “If paid up front, the full $70 million would be subject to California’s highest-in-the-nation 13.3 percent income tax rate” and the 1.1 percent California State Disability Insurance tax rate. Lawmakers modified that tax in 2022 so that it now applies to all of a taxpayer’s wages, rather than the previously capped amount.
“While the federal tax savings of $27.4 million a year will eventually have to be paid once the deferred payments start kicking in . . . the California share of the tax take likely can be avoided altogether” if Ohtani is no longer residing in California at that point, the report said. “Deferring the income potentially saves Ohtani an additional $9.8 million annually in taxes, or $98 million over the life of his contract.”
The center’s report also noted that California’s budget — currently facing an unprecedented $68 billion deficit following a nearly $97.5 billion projected surplus in 2022 — is heavily dependent on taxing higher earners’ income.
“In the latest 2021 results from the Franchise Tax Board, these high-income earners — defined by Internal Revenue Service as taxpayers with adjusted gross income (AGI) of $200,000 or more — comprised only 9.8 percent of all tax returns,” the center’s report noted. “However, this group paid 81.1 percent of the total personal income tax.”
“The amount of income tax Ohtani could save annually by changing his residence in 2033 is equivalent to the total tax liability of the bottom 1.78 million tax filers in 2021 (positive AGI),” the center noted.