Deferred payments in Shohei Ohtani's contract with the Los Angeles Dodgers are at the center of a request to Congress by California's top fiscal officer for a change in tax code.
California Controller Malia M. Cohen wants Congress to cap deferred payments, a change designed to ensure the nation's most populous state is owed more money from Ohtani's lucrative contract with his new team.
The request comes four weeks after the two-way star and the Los Angeles Dodgers agreed to a record $700 million, 10-year contract. The agreement contains $680 million in deferred payments due from 2034-43.
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If Ohtani is not living in California at the time he receives the deferred money, he potentially could avoid what currently is the state’s 13.3% income tax and 1.1% payroll tax for State Disability Insurance, the Associated Press reported.
"The contract is structured so that Ohtani will receive $2 million per year and defer the balance approximately 10 years, when he could potentially return to Japan and escape payment of California state income taxes on the deferred amount," Cohen's office said in a statement issued Tuesday.
Cohen said unlimited deferrals create a top-heavy imbalance in tax structure.
“The current tax system allows for unlimited deferrals for those fortunate enough to be in the highest tax brackets, creating a significant imbalance in the tax structure,” Cohen said in a statement Monday. “The absence of reasonable caps on deferral for the wealthiest individuals exacerbates income inequality and hinders the fair distribution of taxes. I would urge Congress to take immediate and decisive action to rectify this imbalance.”
Ohtani's deal has the potential to save $98 million in state tax, according to the California Center for Jobs and the Economy. The public benefit corporation provides information on job creation and economic trends in California.
The exact terms of Ohtani's contract are not known.
Cohen became controller last year, taking over an officer in charge of accountability and disbursement of the state money. Cohen was president of San Francisco's Board of Supervisors in 2018 and '19.
“Introducing limits on deductions and exemptions for high-income earners promotes social responsibility and contributes to a tax system that is just and beneficial for all," she said. "This action would not only create a more equitable tax system, but also generate additional revenue that can be directed towards addressing pressing important social issues and fostering economic stability.”
William McBride, vice president of federal tax policy at the Tax Foundation, told CNBC that lawmakers haven't made deferred income a priority, choosing instead to address so-called unrealized gains, or investment growth.
"Deferred income runs throughout the tax code," such as income from your 401(k) or executive compensation, he said.
If Congress approved deferred income restrictions, McBride said it would put the state in "a worse position in terms of its ability to collect revenue from these high earners and star athletes because they wouldn't be there."
Steve Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center, told CNBC that a federal tax law enacted in the 1990s might be the source of the problem. The law prevents states from taxing nonresident "retirement income," which can include deferrals.
Pertaining to limitations on state income taxation of certain pension income, the law states, "No State may impose an income tax on any retirement income of an individual who is not a resident or domiciliary of such State (as determined under the laws of such State)."
The law also states that "retirement income" includes "an eligible deferred compensation plan."
"What's really going on here is a federal law that was enacted in 1995 by a Republican Congress to prevent states from taxing pension income," Rosenthal said. "The problem with Ohtani is he can return to Japan and sidestep California taxes."
The Associated Press contributed to this report.
