Shohei Ohtani’s $700 million contract raises tax-deferred concerns for high earners

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

Frederic J. Brown | AFP | Getty Images

While the California comptroller is calling for a cap 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 enacted in 1995 by a Republican Congress to prevent states from taxing retirement income,” he said. “The problem with Ohtani is he can go back to Japan and avoid California taxes.

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

Deferred revenue has not been a priority for Congress

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

“Deferred earnings run throughout the tax code,” he said.

If Congress were to enact a cap on deferred earnings, “it would put the state in a worse position in terms of its ability to collect revenue from these high-earning, star athletes because they wouldn’t be there,” McBride said.

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