Tax rates do matter. Consider the financial implications of baseball superstar Shohei Ohtani’s new contract.
This month, Mr. Ohtani signed a 10-year, $700 million contract with the Los Angeles Dodgers. It’s the largest contract in sports history. He’s earned it. In his previous six years with the Los Angeles Angels, he won two MVP awards, including this past season. He led the American League in home runs, on-base percentage, slugging percentage and total bases. He’s not just a star hitter; he also excels as a starting pitcher. Last year, he had a 3.14 ERA and had a 10-5 record in 23 starts. He’s baseball’s biggest two-way star since Babe Ruth.
Mr. Ohtani doesn’t just throw fastballs in games. He structured his contract to blow one past the taxman, too. Over the first 10 years of his deal, Mr. Ohtani will receive “just” $2 million a year. In the following 10 years, he’ll receive annual payouts of $68 million for 10 years. Don’t feel too bad for him. It’s believed he made between $40 million and $50 million this year in endorsement deals.
But money today is worth more than money tomorrow — let alone in 20 years. Look at why Mr. Ohtani would agree to structure his contract this way. There is a baseball reason. MLB doesn’t have a salary cap but does levy financial penalties on teams that exceed the Competitive Balance Tax threshold. How much a player’s contract counts against that is determined using the average annual value. By delaying payments into the future, Mr. Ohtani’s contract has an AAV of about $460 million. That’s around a $46 million yearly hit toward the CBT. That should help the Dodgers sign additional players as the franchise looks to win another World Series title.
There’s a non-baseball reason this makes sense, too. California has the nation’s highest personal income tax rates. In 2024, its top tax rate will be 14.4 percent. Mr. Ohtani is 29 years old, making him 39 when this contract ends. Likely, he’ll be at the end of his playing career. When he is, he can move out of California and probably avoid its high tax rate on his annual $68 million paydays. By avoiding California taxes, his savings could potentially approach $10 million a year.
Even California’s politicians should see the policy implications. People respond to incentives. High taxes incentivize people to move. The wealthy have the most options when it comes to avoiding taxes. Nevada, which has no state income tax, has long benefited from would-be Californians leaving the Golden State for that very reason.
Dodger fans can hope only Mr. Ohtani is as successful on the field as he is at minimizing his tax bite.