Former Angels baseball player Shohei Ohtani recently signed a 10-year $700 million deal, most of which will be paid in deferred payments, with the Los Angeles Dodgers last month — setting a record as the largest Major League Baseball deal in history. However, with the historic deal arises the matter of how high-earners like Ohtani impact federal taxes and the state’s economy.
On the state level, high-income earners can make unlimited deferrals, allowing individuals like Ohtani to avoid paying approximately $98 million in taxes. California State Controller Malia Cohen is urging Congress to cap deferred payments to prevent high earners from perpetuating socioeconomic inequality. Although having a cap on deferred payments would be ideal, it most likely will not be enacted.
The main issue California faces concerning federal tax law when dealing with high earners like Shohei Ohtani is the House Report 104-389 — State Taxation of Pension Income Act of 1995. Ohtani’s deal with the LA Dodgers falls under this plan as long as he does not spend much time in California to be considered a resident or domicile. What this means for Californians is that a portion of the tax revenue that would have been collected to help fund public services such as education, healthcare and corrections is no longer collected. Vital public services rely on tax revenue from the state, and with high earners like Shohei Ohtani making money in California, it becomes a situation where money is taken out of the state and not recirculated. This poses a potential strain on essential services and hinders the state’s capacity to invest in its reform well-being.
Unfortunately, the state cannot address the loss of income tax revenue due to the previously mentioned House Report 104-389. This federal roadblock is a frustrating obstacle that prevents much-needed changes for a more progressive tax system. California’s ability to lift people out of poverty and secure a brighter future is hampered, and it’s disheartening to see such hurdles in the way of meaningful progress.
Shohei Ohtani’s use of a deferred compensation plan will not only allow him to lower his tax liability legally but also show that this system only benefits the wealthy. Not only does this create an unfair atmosphere, but also puts the public’s trust in the tax system at risk. There needs to be tax reform in both the federal and state governments to tackle these loopholes and guarantee a fair and progressive tax burden among all residents.
Tax law reform is crucial because it would ensure a fair and more equitable distribution of the tax burden by closing loopholes that let some avoid their fair share of taxes. Limits on these high earners can increase equity. Unfortunately, this will not spark a change in federal tax law because Congress, particularly in the House of Representatives, is controlled by Republicans. Unless that changes, these tax revisions won’t see the light of day. Republicans tend to favor profits and have a conservative outlook on their policies. Additionally, the current state of the Republican Party is chaotic; internal disagreements, particularly regarding the selection of a house speaker and the split between Trump and non-Trump supporters, present many challenges for their party. Their lack of cohesion is evident, whereas a chicken running without a head might have better direction.
Despite Cohen’s calls for a cap on deferrals, the enactment of such measures remains dead in the water. The need for a progressive tax system to address inequality is clear, but navigating political roadblocks and existing loopholes poses significant challenges. Until Democrats secure a strong majority in the House and Senate, substantial changes in federal tax law are unlikely, showing the ongoing complexities in achieving a fair and balanced tax system.
