Danny SeidenShohei Ohtani was last season’s unanimous choice in the American League for Most Valuable Player.
The dual threat at the plate and on the mound, Ohtani hit 44 home runs last year and won 10 games as a pitcher.
Having fulfilled his contract with the Angels, the Dodgers in December nabbed Ohtani in the free agent sweepstakes with a whopping 10-year, $700 million contract, the biggest in North American sports.
Not bad for a player rehabbing an injury that will limit him as a designated hitter this spring and will prevent him from pitching until 2025.
That big contract would typically come with a big tax bill. Every dollar over $609,350 will be taxed at the top federal rate of 37%, and he’ll reach the top California rate of 14.4% for earning more than approximately $700,000 and for being subject to the state’s wealth tax.
But here’s where the professionals on Team Ohtani get creative: most of the monster contract is deferred until after the contract period concludes. He’s only taking $2 million a year in salary, with the rest coming in annual installment payments to begin in 2034. And he’s reportedly not charging the Dodgers interest.
Going from a $700 million payroll hit in 10 years to just $20 million is a huge savings for the Dodgers, obviously. But it could be a huge savings for Ohtani, too. He’s bought himself time to get out of California before he starts to collect on the remainder of the contract.
Pulling up stakes and leaving California to avoid its tax environment would hardly be news. The state’s been hemorrhaging residents for decades. Earners of all types are heading for the exits, too. The Public Policy Institute of California reports that in the pandemic era, the number of higher-income households leaving the state “increased dramatically—from less than 150,000 in 2019 to almost 220,000 by 2021,” though the bleeding was stanched somewhat in 2022.
Getting out of California would be a smart move for Ohtani. Federal law says a state can’t impose an income tax on retirement earnings if the taxpayer doesn’t live in the state. California State Controller Malia Cohen says she doesn’t like the law and called on Congress to put a cap on income deferments for high earners.
I’ll let the professional leagues’ collective bargaining units and commissioners determine whether big-dollar contracts with substantial deferments are good for their respective sports or whether they’re a way for teams to attract stars that they otherwise couldn’t afford. (Baseball fans still mark July 1 as Bobby Bonilla Day, the day when the former player gets $1 million from the New York Mets, despite not having played in a game since 2001. The checks won’t stop coming until 2035.)
But let me instead make a pitch for another attractive free agent destination: Arizona.
The top income tax rate here is 2.5%. And it’s a flat rate. Have a great season and negotiate a new deal with a big raise? Congratulations. You’ll still only be taxed at 2.5%. No surtaxes, either, for being a high earner.
Think the glitz and glamor of L.A. or New York would be better for your endorsement opportunities? Keep in mind that Suns star Devin Booker’s new shoe line from Nike sold out in minutes over All Star Weekend.
Many big stars – Larry Fitzgerald, Randy Johnson, Shane Doan, Charles Barkley – have chosen to continue to call Arizona home beyond their playing days. Ohtani, on the other hand, will most likely be decamping for Japan or checking out other states. If not, the California taxman is waiting.
We have a different story. Thanks to an attractive tax environment, the availability of good paying jobs, a diverse economy, lots of educational options, and overall quality of life, Arizona is one of the country’s fastest growing states, proving that all Americans – not just professional athletes – are free agents in search of the most welcoming place to take their talents.
Danny Seiden is the president and CEO of the Arizona Chamber of Commerce & Industry
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