SACRAMENTO, Calif. (AP) — If $700 million wasn’t enough, Shohei Ohtani’s record-breaking contract with the Los Angeles Dodgers could also include a bonus: skipping most of California’s famously high income taxes.
Not even the mighty Dodgers have the ability to relieve Ohtani from paying his taxes. But they and the player can control when Ohtani gets paid. The Dodgers will pay Ohtani $20 million over the next decade when the baseball star joins a National League team, health permitting.
It’s the decade after that when the Dodgers actually start paying Ohtani $68 million annually from 2034 to 2043. Ohtani will turn 40 in 2034, the age at which most Major League Baseball players retire. By then, Ohtani could have stopped playing baseball and chosen not to live in California, potentially avoiding the bulk of his salary from the 13.3% state income tax and the 1.1% payroll tax for state disability insurance.
With 97% of Ohtani’s Dodgers income deferred, that means the state of California — which has an estimated $68 billion budget shortfall this year — will have to wait at least a decade before it can collect taxes on the bulk of his salary, if it can. Achievement rate of 97%. everyone. The state of California can collect taxes from Ohtani’s significant endorsement deals, assuming Ohtani is a California resident.
It is impossible to know with certainty how much taxes the state will pay Ohtani. California law does not allow state officials to provide information about a single taxpayer. The California Franchise Tax Board — the state agency that collects income taxes — says the amount of income subject to tax payments and the timing of those payments varies depending on the technical details of the contract, which are not publicly available.
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But the details of Ohtani’s contract that are known to the public appear to fit nicely within the confines of federal law that specifically prohibits states from taxing the retirement income of former residents, said Kirk Stark, a UCLA law professor who specializes in tax law and cooperation. -Writing a textbook on state and local taxes.
Stark says this law applies to deferred compensation arrangements as long as the income is received in substantially equal payments over a period of at least 10 years. This scenario appears to apply to Ohtani’s contract, meaning he would likely avoid paying California income taxes if he lives out of state once his playing career is over.
“Are they actually doing that? I have no idea. It would require some kind of more detailed assessment of the actual contractual language,” Stark said. “Maybe even Ohtani doesn’t know for sure, unlike the lawyers or anyone else involved in drafting the contract.” “.
During Thursday’s introductory news conference at Dodger Stadium, Ohtani said he structured the contract to help the Dodgers, not himself. He wants the Dodgers to be free to spend more money on other good players.
Taxes for professional athletes are also much more complex than those for ordinary taxpayers. In the United States, people must pay taxes based on where they live and where they work. This means that when the New York Mets play the Dodgers in Los Angeles, the Mets players could be taxed for the days they played in California.
Most states have a formula for how to calculate this, known as a “toy tax,” according to Jared Walczak, vice president of state projects at the Tax Foundation. This formula does not apply to states that do not impose an income tax, such as Texas and Tennessee. And Florida, where many professional athletes move.
Ohtani’s contract highlights the outsized influence that wealthy Californians have on the state’s finances. Of the state’s population of more than 39 million, only about 8,500 people account for a quarter of the state’s income tax revenue each year. That’s one reason state budget officials keep a close eye on the number of companies that each year decide to sell their stock to the public — a process that increases the state’s population of millionaires.
“Ohtani has already and will continue to put up astronomical numbers in this area, yet it is fair to say that it will take much more than his remarkable success to close the budget gap next year,” said Mr. H. D. Palmer, spokesman for the California Department of Finance. Of the estimated state budget deficit of billions of dollars.
The California Center for Jobs and the Economy estimated that California could lose up to $98 million in taxes from Ohtani — an estimate based on a lot of assumptions. It would take 317 similar contracts to cover California’s budget shortfall, said Brock Armour, the group’s president.
“That’s a very small number of people, and every time someone leaves — a high earner — the budget feels it. It just shows the volatility and fragility of the state revenue system,” she said.
Chris Honey, executive director of the California Budget and Policy Center, said it’s fair for wealthy people to pay more in taxes than people with lower incomes.
“The whole point of California’s tax structure is to say that those of you who benefit more than you, and therefore are wealthier and have higher incomes, should pay more in taxes than someone making the minimum wage,” he said.
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Shohei Ohtani, the highly sought-after Japanese baseball player, has been the subject of intense speculation as he decides which Major League Baseball team to sign with. One of the key factors in his decision could be the potential tax benefits that come with signing a contract with the Los Angeles Dodgers. With California’s high income tax rates, Ohtani could stand to benefit financially by joining the Dodgers and mostly avoiding the burdensome state taxes. This potential bonus adds an intriguing element to the already intense competition among teams vying for Ohtani’s talent.