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Tuesday, May 21, 2024

States Want Tax Reform As Ohtani’s Deal Deferrals Stir Controversy

  • California legislators heighten their push for new tax rules around deferred compensation.
  • Today’s tax filing deadline recalls how complex ‘jock taxes’ can be for many athletes.
Matt Krohn-USA TODAY Sports

It’s Tax Day across the U.S., the deadline by which individuals and organizations must report their financial state for 2023 to the Internal Revenue Service and state officials. But some California legislators are already thinking ahead to future tax years, with Dodgers superstar Shohei Ohtani at the center of their focus. 

Ohtani’s unprecedented $680 million in deferrals in his record-setting $700 million contract, to be paid out between 2034 and ’43, have inspired a legislative bill calling on the U.S. Congress to establish a “reasonable cap on deferred compensation,” in turn allowing individual states to capture more tax revenue. The California Center for Jobs and the Economy has calculated that Ohtani could save up to $98 million in state taxes by moving to another state or out of the country, and some in the Golden State want at least a meaningful portion of that money.

“It is disturbing that Shohei Ohtani and other individuals can perform a hidden ball trick using an obscure tax loophole to avoid hundreds of millions of dollars, and it’s a concerning precedent,” said California state Sen. Josh Becker, author of the legislation. “The current system exacerbates the unequal distribution of taxes.”

Soon after Ohtani signed his Dodgers contract, California controller Malia Cohen called on the IRS for help. The proposed state legislation seeks to take the matter a meaningful step further, though the bill text at present only speaks to California “urging” Congress to take action on this issue. The legislation, also sponsored by Cohen, has cleared the state senate committee on revenue and taxation, and Tuesday was passed by the full senate. 

Even beyond the proposed California measure, the issue of deferred compensation is becoming increasingly prevalent, particularly in sports, as it is structured into a growing number of contracts.

“Salaries are rising, and structuring compensation and making different arrangements to obtain talent in states like California is definitely a trend. Teams are getting more creative in a lot of different ways, deferred compensation being one of them,” Michael Rueda, partner and head of the U.S. sports and entertainment practice group at the Withers law firm, tells Front Office Sports. “It’s definitely on the radar across different leagues and different markets.”

Ohtani’s tax situation also was something of a subplot in the recent federal tax fraud charges levied on former interpreter Ippei Mizuhara. Accountants and financial advisers employed by Ohtani told federal investigators that Mizuhara told them that the account he was using was supposed to be “private” despite their concerns about Ohtani possibly having tax issues around the account.

Filing Complexities

The Ohtani-led deferral issue highlights what is already a complicated situation for most pro athletes centered around their tax filing. Most players are subject to “jock taxes,” requiring the filing of non-resident returns for every state where they play road games in a given year. That means an average NFL player will file eight to 12 non-resident state returns, an NBA or NHL player 16 to 20, and an MLB player often 20 to 25. 

The California legislation, if successful, could have a meaningful impact on that jock tax by bringing more income into current-year taxation. 

“If California persuaded Congress to change the deferred comp system somehow, it would presumably not only benefit California, but all states where professional athletes are playing,” Elizabeth Bawden, a partner with Withers’ private client and tax team, tells FOS

Still, Rueda and Bawden predict an uphill fight for the California measure, with federal officials having many other priorities beyond a state-level issue such as this, and 2024 also being a presidential election year.

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