Shohei Ohtani’s $700 million contract sparks concern about taxes on deferred income for high earners

Wealth

Japanese baseball player Shohei Ohtani attends a press conference on his presentation after signing a 10-year deal with the Los Angeles Dodgers at Dodgers Stadium in Los Angeles, California, on Dec. 14, 2023.

Frederic J. Brown | AFP | Getty Images

Roughly a month after Shohei Ohtani signed a $700 million contract with Major League Baseball’s Los Angeles Dodgers, California’s controller is calling for “immediate and decisive action” from Congress to limit deferred income for higher earners.

The Japanese pitcher’s record-breaking deal defers $680 million for 10 years and has raised questions about future state taxability — especially if Ohtani eventually leaves California. For 2024, California’s top tax rate is 14.4%, which includes a 1.1% payroll levy.

“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,” California State Controller Malia Cohen said in a statement Monday referencing Ohtani’s contract.

“The absence of reasonable caps on deferral for the wealthiest individuals exacerbates income inequality and hinders the fair distribution of taxes,” she said. “I would urge Congress to take immediate and decisive action to rectify this imbalance.”

Deferring $68 million annually for 10 years could save Ohtani $98 million over the life of his contract, according to an estimate from the California Center for Jobs and the Economy. However, the estimate uses several assumptions, and the exact terms of Ohtani’s contract are unknown.

While California’s controller calls for restrictions on deferred income, that may not be the source of the problem, according to Steve Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center.

“What’s really going on here is a federal law that was enacted in 1995 by a Republican Congress to prevent states from taxing pension income,” he said. “The problem with Ohtani is he can return to Japan and sidestep California taxes.”

The provision prevents states from taxing nonresident “retirement income,” which can include deferred compensation.

Deferred income hasn’t been a priority for Congress

While some Democrats have called for higher taxes on the wealthy, lawmakers have focused on areas such as so-called unrealized gains, or investment growth, rather than deferred income, said William McBride, vice president of federal tax policy at the Tax Foundation.

“Deferred income runs throughout the tax code,” such as income from your 401(k) or executive compensation, he said.

If Congress enacted restrictions on deferred income, it would “put the state in a worse position in terms of its ability to collect revenue from these high earners and star athletes because they wouldn’t be there,” McBride said.

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