The Ohtani Series
Article 1
Putting Baseball's Most Striking Contract in Economic Perspective
Ohtani’s on- and off-the-field behavior, inevitably, has been evaluated from the outset against his nine-figure guarantee that starts with a 7.1 Beneath the sheer sum of the signing, the kind of contract details that excite economists were quickly dug up. The Athletic reported that Ohtani would defer $68 million annually, receiving 97% of his total guarantee from 2034 to 2043, after he walks off the pro ball field for likely the last time. While MLB contracts can defer as much money as the parties agree to,2 Ohtani’s arrangement exploits this contract structure at an unheard-of magnitude, in both absolute and proportional terms. The question becomes, what are the economic and financial incentives that led to that agreement, and the consequences that lead on from it? Considering that all stakeholders involved – Ohtani himself, the Dodgers, the MLB – want to literally and metaphorically win, for whom does this contract make the best deal? And how does the contract really compare against other big deals in North American major league sports?
- The MLB’s Mookie Betts, Yoshinobu Yamamoto, Mike Trout, and Francisco Lindor;
- The NFL’s Patrick Mahomes, Lamar Jackson, and Nick Bosa;
- And the NBA’s Nikola Jokic and Luka Doncic.
The main method economists have for evaluating these contracts on a level playing field is to bring the total value of the contract into today’s dollars. The cornerstone economic concept of the “time value of money” holds that a dollar today is worth more than that dollar in the future, as inflation shrinks purchasing power over time. Deferrals on earnings also carry the “opportunity cost” of losing out on the interest one could earn by investing funds today. The “discount rate” is the factor we apply to quantify how much uncertainty is reflected in these multi-year deals, both for the players on the receiving end and for their teams on the paying end. Because the risks and constraints to these parties differ substantially, the choice of an appropriate discount rate is in the eye of the (financially literate) beholder.
As an exercise to explore just how much that discount rate determines the present value of a serial cash flow (in other words, a multi-year contract), we calculate several potential present values for Ohtani’s contract, with discount rates ranging from 1% to 12.5%. The larger and longer the deferral a player has, the greater the impact of those discount rates. At a modest 1% discount rate, Ohtani wins out among the comparators, and with the most valuable contract in MLB history, at a total present value of almost $606 million. When we apply 12.5%, however, his contract value dwindles to second smallest, at a little over $135 million. There’s no “right” discount rate to assess the value of these contracts; selecting one is based on the expectations about the future that the person running the numbers brings. But more on the devilish details of the entire inter-player, inter-league comparisons in a later post.
For now, let’s revisit the agreement that kicked this all off, between Ohtani and the Dodgers. The main point of this deal is to win now and worry about the rest later. Ohtani will receive just $2 million every year he’s an active player, which in 2024 accounts for less than 1% of his team’s adjusted payroll. The fuller heft of Ohtani’s contract is better reflected in the proportion it comprises of the sum the Dodgers will be taxed on by end of year. That sum is a tally of players’ average annual contract values (AAVs) against which the MLB’s “Competitive Balance Tax” (CBT, or “luxury tax”) is levied, if the collective salaries exceed a prescribed threshold. Ohtani’s contract money eats up over 15% of that balance in 2024. It is for luxury tax purposes that we see the present value-adjusted impact of his contract come to bear. According to the league and players’ union’s most recent collective bargaining agreement, Ohtani’s $680 million deferral gets discounted by the October 2023 federal mid-term rate of 4.43%. Once the $20 million he’ll receive through his active years is added back to his discounted deferral, Ohtani’s contract is listed with an AAV of around $46 million. But for whom, and how, does that $46 million number reflect real value?
It certainly is more valuable short-term accounting for the Dodgers as they manage their “competitive balance” against the league’s tax policy. What if Ohtani hadn’t deferred? If he really had gotten $70 million annually for a decade, that would leave him responsible this year for over 20% of the Dodgers’ total tax allocations, and almost 30% of the league’s CBT threshold, all else equal. A comparative way to think of it would be that, under this hypothetical, the resulting $24 million yearly bump in Ohtani’s tax weight is just $3 million short of the current taxable value of his new teammate and fellow countryman, Yoshinobu Yamamoto’s, contract. If Ohtani’s contract were structured on an accelerated timeline, his installments would likely crowd out acquiring Yamamoto, and year-on-year, the Dodgers’ ability to surround the new star with other team-building talent. It’s clear why the Dodgers would try to avoid such a hit, and why Ohtani would loan them the contract length to do so.
From Ohtani's standpoint, the contract didn't need to be designed for someone living paycheck to paycheck. Ohtani has been reported to be baseball’s “highest earner in endorsement contracts,” having made “north of $20 million a year from endorsements” in 2022 and double that in late 2023. With that kind of income cushion, Ohtani doesn’t need to worry about getting handed only 0.3% of his contract guarantee per year of his playing days. Instead, he can focus on doing his part to win. When news first broke about the contract, Ohtani was credited with proposing his unique contract structure, asking whether, given how much is deferred, the “team [has] a better chance to compete?” For a player that hasn’t yet made it to the postseason in six MLB seasons, moving to a team with the deep postseason history and deeper pockets of the Dodgers seems like a winning move.
In our subsequent commentary, we'll continue our analysis — presenting notable aspects of these big-money contracts, comparing them under a range of present value discounts, looking into the past at previous milestone-making deals, projecting how the Dodgers’ financials can pull their weight for Ohtani’s contract, and exploring the tax laws that athletes encounter everywhere they play and live.
1After 50 games played and 198 at-bats as a Dodger thus far, Ohtani has been off to a career-best start at the plate. He leads the MLB with a batting average of .354, and is tied for fifth with 13 home runs.
2Article XVI of the 2022-2026 MLB Players Association Basic Agreement allows that “There shall be no limitations on either the amount of deferred compensation or the percentage of total compensation attributable to deferred compensation for which a Uniform Player’s Contract may provide” (89).
The Largest Contract in MLB History... or Is It ?
Ohtani’s contract with the Dodgers has been widely deemed an astounding agreement, both in total dollar amount and the portion of salary that will be deferred. In order to determine how singular this contract really is, we delved into the history of MLB contracts with a specific focus on large contracts and deferred payments. We then compared Ohtani’s contract to other past players with historically large contracts or those who notably deferred significant amounts of their salaries.
As we have seen this year, shockwaves spread across the baseball world at the news of Ohtani’s contract. Similarly, fans and players alike were stunned in 1998 when Kevin Brown signed the first baseball contract for over $100 million, coincidentally with Ohtani’s own LA Dodgers.1 So how does Brown’s contract stack up against Ohtani’s, when adjusted to today’s money? Brown’s contract did not include any deferred money, so it’s not an exact correlation in terms of contract structure, but there are still valuable comparisons to be made. The sticker price for Brown’s $105 million 7-year contract, when adjusted for inflation, comes out to about $180 million, or about $25.82 million per contract year.2 Compared to Ohtani’s $700 million number ($70 million per contract year), Brown’s pales in comparison. But what happens when we also adjust Ohtani’s guarantee, given that $680 million is deferred? Though an argument can be made for discounting that deferral back at several different rates, we will apply the MLB’s 4.43% discount rate to the money Ohtani is slated to receive in each contract year (10 active years and 10 inactive), which sums to a calculated total value of $374 million. This is much lower than the $700 million sticker price, as most of that money will be paid out over a decade in the future. Averaging that number over Ohtani’s 10 active contract years, we’re looking at about $37.4 million per year. While Ohtani still comes out on top compared to Brown, his lead is no longer as unprecedented as it first appeared to be.
Of course, the eye-popping sticker price wasn’t the only striking feature of Ohtani’s deal. The contract also made history with the total amount of money deferred until after Ohtani is no longer playing for the Dodgers. Although these deferred sums may be the highest in MLB history and have brought new attention to the concept, it goes back several decades. Bobby Bonilla is one of the most well-known examples of a player receiving deferred payments, getting them from two teams, the Orioles and the Mets. Each year from 2004 up to 2028, Bonilla receives $500,000 from the Orioles. Unadjusted, that comes out to $12.5 million over 25 years, all for two years of play from 1995-1996. After the Mets released him in 2000, they agreed to buy out the remaining $5.9 million on his contract. Instead of paying it out at that time, however, they agreed to pay Bonilla almost $1.2 million annually for 25 years, beginning in 2011.3 July 1st has become known as “Bobby Bonilla Day” among Mets fans, as each year on that day he collects his payment of $1,193,248 from a team he hasn’t played for in over two decades.4 While there are a lot of factors at play in determining who comes out better off in Ohtani’s deal with the Dodgers, it’s not hard to figure out that in Bonilla’s case, the Mets struck out big time with the deal. The team’s ownership had heavily invested in a Bernie Madoff account that they expected to deliver a significant profit. If the name Madoff doesn’t ring any bells, suffice to say, the account did not deliver. The unadjusted sum of Bonilla’s deferred payments, which span from 2011 to 2035, is almost $30 million. Together with his payments from the Orioles, that comes out to $42 million in deferred payments. When we adjust those payments into today’s dollars, adjusting the past years for inflation and the future years for present value (with the same 4.43% as Ohtani), Bonilla comes out with $46.5 million. While that is just a fraction of Ohtani’s deferred payments (the sum of his present value-adjusted deferred payments is close to $357.7 million), maybe Bonilla’s creativity in receiving payments for 32 years after he last stepped up to bat served as inspiration for Ohtani to create his own one-of-a-kind deal.
An interesting consequence of deferred payments is that retired players can remain among the highest-paid on a team’s roster, often making more money from their deferred payments than the team’s star active players. While Ohtani is indisputably one of the brightest stars in the MLB at present, there are in fact two retired players who will earn a higher salary than he will this year without setting foot on the field: Ken Griffey Jr. (details below) and Chris Davis (earning a total of $42 million between 2023 and 2037, with over $9 million coming this year). Of course, this is largely because Ohtani is deferring such a substantial portion of his own salary; in 10 years’ time, he will likely be receiving more from his own deferred payments than most active players at that time, and possibly more than several top-tier players combined.
Taking a closer look at Ken Griffey Jr.’s contract with the Cincinnati Reds, 2024 marks his last year of deferred payments, which began in 2009.5 Adjusted to present value, the sum of these deferred payments is over $72 million. This year he earns $3,593,750, exceeding Ohtani’s comparatively meager salary for the year of $2 million. But if Ohtani’s ego is bruised by that fact, he can take comfort in the knowledge that when his deferred payments are factored in and his salary is averaged over his playing years, his annual earnings are higher than Griffey Jr.’s ever were, even in his highest-paid active years. Griffey Jr.’s peak earnings came in the year 1997; he earned about $17.74 million in today’s dollars, when his $9.125 million pay for that year is adjusted to today’s money. Ohtani’s average yearly pay still exceeds this by about $19.7 million.
Going further back, we can look at the MLB’s other famous two-way player, Babe Ruth. Possibly the most well-known player in baseball’s history, Babe Ruth’s career spanned 22 years from 1914 to 1935. Over those years, without adjusting any of his salaries, Ruth made about $897,000, a very far cry from what Ohtani is slated to earn (and has already earned). But almost $900k a century ago isn’t too bad, all things considered. When we adjust those salaries for inflation, Ruth comes out with roughly $18 million in today’s terms. That’s right; over his entire professional baseball career, Babe Ruth made less money than Ohtani will make from the Dodgers over the next decade. To put it in another perspective, Ohtani made more, $30 million, from just last year with the Angels. Additionally, Babe Ruth signed very few contracts that spanned more than a year, which differs from the contracts signed by today’s big-name players. There’s a whole host of other things causing the differences in the salaries of two players a century apart, but it shows how much the game and structure of player salaries have changed over that time, and how they could change in the next 100 years.
Looking back through the annals of baseball history and performing some simple present value calculations reveals that despite the hype this year, MLB players from years past have broken many extraordinary barriers, and we can see in their contracts the precursors to a deal like Ohtani’s. But his deal with the LA Dodgers has nevertheless changed the game when it comes to contract structure and deferred payments. While he is not the first player to defer a large portion of his salary, he has taken deferred payments to an extreme never before seen in the sport. Just as others throughout history paved the way for him, he now paves the way for future stars of the sport. Ultimately, it remains to be seen what the consequences of this deal will be long-term, and whether others will follow Ohtani’s example, but perhaps sometime in the future when we find ourselves marveling over baseball’s first billion-dollar deal, we’ll end up tracing a line right back to this point.
1 Kevin Brown | MLB | Spotrac.com
3 Bobby Bonilla | MLB | Spotrac.com
4 Bobby Bonilla Day explained - Why the Mets still pay him $1.19M today and every July 1 - ESPN
Article 3
In The Club: Ohtani and His High-Priced MLB Peers
Now that we’ve put the Ohtani contract in the context of its ceiling-raising forefather deals, it’s worth updating the view to what players taking the field with him today are taking home. One statistic that jumpstarts this discussion? Per The Athletic as of this past December, in the MLB "[o]nly 12 players [had] ever signed for at least $300 million. Most of those have been extensions.” The roster of contemporaries we selected to compare comes straight from that rather exclusive club. Mike Trout, Mookie Betts, and Francisco Lindor all re-upped for total-value extensions between $40-$100+ million dollars over that ($300M) threshold. Ohtani and his teammate Yoshinobu Yamamoto became the latest to blow well past the mark with the big bets placed on them out of free agency. All these guarantees last a decade or more, meaning the teams that signed on are investing for the long run of these late-twenty-something stars’ playing days (and beyond). They all reliably rank in the top 10 largest contracts in the league by total value1though owing to their length most of these deals are edged out of an alternative top 10 ranking by Average Annual Value (AAV).
To get a feel for the financial weight of these players, let it sink in that the combined cash they’ll receive this year alone amounts to:
- Over half the cash the Yankees will shell out to their 26-man active roster this year
- Over 11x the cash the Marlins will pay out to cover their roster
- 135% of the cash the average team is responsible for
- And 4% of the total cash owed under all 2024 active MLB contracts.2
And in case those comparisons mean nothing to the average Joe, that’s also enough money to cover 27 million stadium hot dogs, taking care of ballpark dinner for almost 40% of those that attended an MLB game in 2023.3
Just because these players are all earning mind-boggling sums doesn’t mean that their unique contract structures become negligible; in fact, quite the opposite. The competition heats up among the team executives, agents, fans, investors and other sports-world makers that all have a stake in these players’ outcomes. Everyone is eager to see whether the on-field statistics that are ostensibly being compensated for continue to make sense of these deals. And, they’re trying to predict the next 10 to 20 years of contract innovation that’s being written based on these precedents.
The most unique aspect of Ohtani’s contract is, paradoxically, also the thing that anchors it on earth and keeps it in conversation with these other players’ deals: his deferrals. When assessing the present value of these contracts, we adjusted all annual cash flows for inflation, but only additionally discounted contracts that contain deferred money. Table 1 below shows the total value of each player’s contract, its complete lifespan, inflation-adjusted present values at two discount rates, and the declines in present value relative to face value once those rates are applied.
The Angels’ Trout and Dodgers’ Yamamoto both landed with 12-year, non-deferred deals. We thus evaluate the present value of their contracts simply by bringing past years’ cash into present-inflated dollars4and depreciating their future earnings by the Fed's 10-year expected inflation rate.5
Meanwhile, deferrals make up 15% of Lindor’s and 32% of Betts’ contracts, versus 97% of Ohtani’s contract. As tabulated above, those players lose 9-11%, 16-22%, or 35-49% of their deals’ sticker price values, respectively, once discounted back to the present. When you’re getting that much money a decade down the road, uncertainty and opportunity cost really do come to weigh on the value of that future dollar. At first glance the gap between a $700 million contract and a $325 million one (Ohtani to Yamamoto, at face value), or even between a $700 million agreement to the next largest $427 million guarantee (Ohtani to Trout, at face value) seems, well, absolutely gaping. Nobody stands a chance of capturing the value Ohtani signed for. However, at a discounting of 4.43% the spread between Ohtani’s $455 million and Yamamoto’s $287 million in present value is $168M; at 10% the spread narrows to $70 million, plus Ohtani cedes the top contract value spot to Mike Trout by a 14% slide; Trout, by contrast to Ohtani, is getting all his money as he plays out his remaining career.
To rationalize our discount rate selection: we applied the 4.43% rate in keeping with popular acceptance of the present value accounting dictated by the League’s latest collective bargaining agreement.6 Some readers eyeing the nitty gritty details of this discussion might notice that, at a 4.43% discount, a $455 million present value for Ohtani’s contract doesn’t quite match the $460 million7($46 million, annualized) estimated by the MLB as his contribution to the Dodgers’ potential luxury tax bill. Discounting each cash flow on an annual basis takes a slightly larger bite out of the total initial value (resulting in a slightly smaller present value sum), versus compounding his total $680 million deferral by an exponent of the 10 years over which he’ll receive that amount.8
As for the 10% discount, that is the average stock market return over the last century, based on the S&P 5009 And, that is likely still a conservative foregone rate of return for well-invested professional athletes – especially those reaching the kind of mythical personal brand heights Ohtani approaches.
So, let’s play out a hypothetical. If we wind the clock back to the day Ohtani and company announced his deal and assume he had inked a $550 million agreement,10 what could that kind of “fast cash” have grown into? If he were banking $55 million per year for the next 10, he could have turned $550 million into 161% of itself over the decade. We assume he would have invested those earnings in a fund getting 10% annual interest, and we adjust for inflation at the same 2.36% 10-year expected rate from the above comparisons. On this accelerated schedule, Ohtani would have crossed the $700M threshold on the open market between just 5 and 6 years down the road from now. And while we can’t neglect to mention that he would pay millions more in taxes on this up-front money than he will likely be liable for on his deferrals, he would probably still come out on top in this alternate universe.
Next time at the plate we’ll take a swing at understanding how teams tend to finance these hundreds of millions, and how the Dodgers plan to pay their way with the real-world Ohtani deal they have. Later, we’ll dive deeper into what kind of stake the jurisdictions where these players live and work have in their contracts, via their taxable value.
2 Statistics tabulated from Spotrac’s MLB Team Cash Tracker:
3 $5.32 is the league average cost of a hot dog. 70,737,365 was record attendance in 2023, a 9.6% jump from the previous year
7 See Jon Becker’s tweet embedded in this FanGraphs blog, hitting the highlights of the math that yield’s Ohtani’s top-spot number on this Dodgers payroll tracker:
8 Taking Ohtani's total $680M deferred payments and discounting by 4.43% for 10 years yields (in millions of $): \(20+680(1.0443)^{-10}\approx460\). Discounting for inflation and his deferrals annually yields: \(\sum_{i=2024}^{2033}2(1.0236)^{-(i-2024)}+\sum_{j=2033}^{2043}68(1.0236)^{-(2033-2024)}(1.0443)^{-(j-2033)}\approx455\).
9 See TradeThatSwing and NerdWallet
Article 4
Dealing with Deferrals: How the Dodgers will Pay for Ohtani
The Dodgers are in a unique position where they have acquired the extraordinary talents of Shohei Ohtani, with the superstar dropping a deal the club itself wouldn’t dream of suggesting -- a $700 million contract split into a $2 million yearly salary with the remaining $680 million deferred for 10 years. This bizarre deal can seem too good to be true, so how can the Dodgers navigate this situation? Here, we explore a financial vehicle of choice available to the Dodgers, how the deferral affects the luxury tax the Dodgers will face, and how these features illustrate the ways baseball teams earn revenue.
The owning entity of the Dodgers, Guggenheim Baseball Management (GBM), consists of a board of executives and controlling partner Mark Walter, who is also CEO of global investment and asset management firm, Guggenheim Partners (GP). Given that GP and GBM share a founder, it would be reasonable to assume that the Dodgers would have direct access to the firm and leverage it to invest their money without the associated fees normally charged to external clients. The average stock market return is about 10% per year, but for our analysis we can expect a firm like Guggenheim to try and beat the market. Using their more aggressive Rydex-Equity Leveraged products, and excluding inverse strategies, we take the Average Annual Total Return over the last 10 years of each Rydex-Equity Leveraged fund and then average their returns to estimate an average return of 12.41%.1 If the Dodgers were to take the deferred $680 million and invest it over 10 years, they could make upwards of $2.19 billion. And if they were to do this combined with an insurance policy, they would not be taxed on the interest income gained.2 Additionally, because Mark Walter runs both GP and GBM, we can assume that these services would be done in-house without the expense ratio fees normally charged to clients. If we redo our calculations so that the average net expense ratio of 1.69% from these products does not cut into the total, their investment could instead reach $2.23 billion. They could feasibly pay out Ohtani’s $680 million and still have over $1.5 billion to spare.
This earnings trajectory of potentially $2.23 billion is a hypothetical upper limit if the Dodgers invest the entire deferred $680 million all at once. There is a stipulation in the CBA that starting in two years, the Dodgers must annually prove to the league that they have set aside an amount equal to the present value of the deferred obligation.3 In other words, they will need to have at least $46 million4 each year that will eventually pay out Ohtani’s contract when the time comes. The $46 million can continue to grow in the form of investments, as the Dodgers are free to set aside those funds in financial vehicles of their choosing. According to the CBA, the money need only be “maintained in the form of unencumbered assets comprising cash or cash equivalents and/or registered and unrestricted readily marketable securities”.3 It is unclear how the Dodgers will portion out the $680 million between investing or player spending, but as long as they follow the rules, they are free to invest as they wish.
Another factor the Dodgers would need to consider would be the luxury tax. If we take as a hypothetical, paying Ohtani his full contract without deferrals (i.e., paying him $70 million a year), we estimate the Dodgers would pay over $25 million more in luxury taxes for the 2024 season than they will as it is.5 Given that specter, it is understandable why negotiations between the parties would yield a contract structure that helps management dodge a penalty of this magnitude and frees up team resources. The Dodgers don’t get off scot-free under the current reality, as they still have to pay luxury taxes attributed to the present value of Ohtani’s contract, but it’s still largely preferred over a non-deferred $70 million that would throw serious weight around in both their payroll and luxury tax calculations.
Finally, there is also the implicit agreement between Ohtani and the Dodgers that they will use this money to buy more talented players in the here and now, surrounding Ohtani with a winning team today versus just investing for tomorrow. If the Dodgers were to simply put away all the money, this would go against the spirit of the agreement and negate the reason Ohtani approached the Dodgers with this offer at all. Given that Ohtani can exit the contract in the event of a leadership change;6 it seems he wouldn’t have extended such a line of credit to just any team’s management, and he expects the current leadership to act readily with it. Although we can’t know or predict exactly how the Dodgers will allocate their funds moving forward, the Dodgers have a mandate and the flexibility to build an elite team and get the most out of the deferred agreement.
Now that the Dodgers have landed this remarkable deal, how does their generally high liquidity compare to that of other teams in the MLB? We compare the teams with the most and least active cash: the New York Mets and Oakland Athletics, respectively. The Mets owe $175,961,772 compared to $27,483,452 of the A’s, a factor of over 6x, and the Mets have an adjusted payroll total of $316,467,721 while the A’s have $62,674,610, a factor of 5x. This is all in comparison to the Dodgers’ active cash of $178,391,737 and adjusted payroll of $238,571,2997 - much more in the same ballpark as the Mets than the A’s. An additional $70 million owed to Ohtani without the deferral would increase the Dodger’s payroll to over $308 million, a 29% increase. With nearly 30% saved in their payroll, the Dodgers should be able to acquire several quality players to surround Ohtani instead. We already see this with the signing of Yoshinobu Yamamoto, with his luxury tax taking up the portion Ohtani’s would have taken. And although money isn’t always an indication of success, the Dodgers are currently at the top of their division, Mets in the middle, and the A’s last (as of 8/15/24).
But there is always a bottom line to worry about, so how is this deal beneficial to the Dodgers? In the MLB, revenue is generated primarily through ticket sales, league-shared revenue, and local media deals. Bringing fans to ball games makes up 31% of that pie, while a team fills in 26% with shared revenue, then local media at 23%.8 How much local media revenue a specific team can bring in for themselves will depend on their contract with a regional sports network (RSN). For instance, the Padres had their RSN contract terminated by Bally Sports when Bally Sport’s parent company, Diamond Sports Group, filed for bankruptcy. Meanwhile, the Dodgers jointly own Spectrum SportsNet LA with Charter Communications and have a 25-year broadcast agreement worth $8.35 billion. And even while they’re already well set up, it’s undeniable that Ohtani’s star power will give the Dodgers a boost across all three revenue sources that no other single player is likely to match. Zooming out to his impact on the economy as a whole, Ohtani's impact as a Los Angeles Angel was certainly channeled through the aforementioned avenues, with an estimate of $143.6 million impacting the US economy.9 This will undoubtedly benefit the MLB overall, as even people who don’t typically follow baseball are becoming aware of Ohtani’s name and could potentially start attending these games out of sheer curiosity.
Ohtani has gifted the Dodgers an unexpected boon, one of which they are in good standing to take advantage. With the partnership of the financially savvy club and once-in-a-lifetime two-way superstar in place, both parties have the complimentary attributes required to play off each other’s strengths and elevate each other to new heights. The deferral will save the Dodgers $25 million in luxury taxes and free up their active payroll to only owe Ohtani $2 million a year as opposed to a present value $46 million a year or hypothetical non-deferred $70 million a year. With the remaining deferred $680 million that could grow to $2.23 billion, the Dodgers have the option to invest that money or spend it on players. Only time will tell whether they can deftly maneuver the financial flexibility of the contract and realize this powerful symbiotic relationship to its fullest potential.
1 Mutual Fund Product List | Guggenheim Investments
2 How The Dodgers Will Likely Fund Shohei Ohtani’s $680 Million In Deferred Payments (forbes.com)
3 Article XVI of the 2022-2026 MLB Players Association Basic Agreement (89).
4 MLB’s calculation of the present value of Ohtani’s deferred contract
7 2024 MLB Team Salary Cash Tracker (spotrac.com), 2024 New York Mets Payroll Table (spotrac.com), 2024 Oakland Athletics Payroll Table (spotrac.com), 2024 Los Angeles Dodgers Payroll Table (spotrac.com)
8 How Do Sports Teams, Leagues and Owners Make Money? A Breakdown (sportico.com)
9 How Much Revenue Does Shohei Ohtani Actually Generate? - MLB Trade Rumors
Article 5
Ohtani's Homerun Deferrals: How He's Batting 1000 With His Taxes
Ohtani’s first year with the Dodgers has in fact been the high stakes ride that was promised, more or less by definition, when he signed for $700 million. From an uncertain start clouded by a gambling controversy, on to joining the 40-40 club, creating the 50-50 club, landing in the World Series, dramatically dislocating his shoulder mid-game and still winning it with the superstar teammates he envisioned would surround him when he became a Dodger, Ohtani’s 2024 season reads better than sports fiction. He joined the Dodgers carrying his own and others’ expectations that winning championships was the only way to make his deal pencil out. And while the team managed to pull it off in style this year, their ultimate victory wasn’t something that could be written into Ohtani’s contract. Instead, the potential triumph that is already seeded into his deal is the amount of state income tax that he may get away with – or more likely get away without – paying.
It probably comes as no surprise that most Americans aren’t fans of the tax system and get easily overwhelmed navigating its myriad rules.1 As for the financial lives of professional athletes, while we typically just ogle the number of pre-tax dollars signed to their names, we’re less likely to consider the thorny logistics of earning millions of dollars in a dozen plus jurisdictions across the country. They must pay income tax in the states that levy it where they play their away games (just as any kind of professional does that works across state lines). These are colloquially known as “jock” taxes, and to properly pay them the average MLB player submits 14 state returns, plus one for Canada. Given the amount of paperwork required alone, to say nothing of the sums they're handing over, it’s understandable that athletes would aim to minimize their tax liabilities. For some, that means establishing residency, regardless of where they play, in a state with no income tax; for others, like Ohtani, that means foregoing hundreds of millions of dollars up front.
As nearly every Ohtani follower well knows by now, his contract is organized around 97% deferred compensation, so he will be paid $680 million in equal portions every year from 2034 through 2043. Precisely because the payments are equal and arrive over at least ten years, Ohtani stands to evade California’s income tax when his playing time with the Dodgers is up.2 The probability that he’ll ride off into the sunset like this has caught the attention of California lawmakers that want desperately to funnel back into the state a significant share of what he will have earned working inside state lines. Ohtani also stands to minimize income taxes owed to all states he plays in throughout his tenure.
For estimating the total multi-state taxes owed by Ohtani, we first mapped out where and how often he would play. States base their tax billing on a player’s duty days, or how many days of their working time are spent in each state. The MLB has a schedule of 185 duty days. To count days per state per player, we estimated the number of away games that the Dodgers have played or will play each past and future contract year. Those counts were based on game scheduling decided by the recent MLB Collective Agreement and analyses of past game location trends. We then prorated Ohtani’s annual income by his respective state-days and applied the various tax rates accordingly.3 Our calculations are just a rough estimate of the tax burden Ohtani will face throughout the life of his contract. The method doesn’t consider potential state-by-state changes to the tax codes over the next decade.
If we analyze Ohtani’s current deferred contract under this system, he stands to pay out roughly $1.6 million in taxes over 10 years to state jurisdictions. That represents about 0.22% of his total face-value contract.4 To put it in another perspective, for the 2023 season, Ohtani signed a $30 million contract with the Angels and paid an estimated just-shy-of $3 million in state taxes. On a contract that covers less than 5% of his shiny new $700 million sticker price, the tax he paid amounts to almost double what he will now pay over a whole 10 years.
Let’s instead consider if history had been written differently, and Ohtani had landed a contract without deferrals and a lower face value. For example, if he received $550 million for the next decade of play, his state income tax liabilities alone would come out to be about $54 million. That sum effectively erases an entire year of salary under that contract, and the number also represents roughly 3000% more than what he is really likely to end up paying.
In his “home” state of California, regardless of the contract configuration we try on for size, Ohtani bats into the state’s highest tax bracket, where the progressive rate reaches 13.3% (and disability insurance adds another 1.1% tax). These in-state circumstances mean a few things. On the hypothetical contract above, he would pay $47 million alone, or 87% of that total ($54 million) state tax bill. If we assume he was not afforded the retirement income loophole via the deferrals upon which he currently relies, he would pay California about $9.8 million each year ($98 million for the decade), and that would come to about 14% of his entire contract income. I real life and legally, however, he will owe the state just $1.4 million, or 0.2% of his grand slam deal.
Considering this huge shift in weight between Ohtani’s hypothetical and real tax situations, the incentive seems quite strong to defer as much as Ohtani and advisors were able to negotiate. To other stakeholders across the system, however, such a financial coup doesn’t seem quite fair. The magnitude of Ohtani’s deal has attracted the attention of California State Senator Josh Becker, for example, who introduced a bill this spring asking Congress to establish a cap on the amount of compensation that can be deferred,5 though Becker himself canceled scheduled summer hearings to evaluate the bill.6 If Ohtani did have to pay $9.8 million in taxes this year, that would represent about three one-thousandths (0.003%) of California’s 2024-2025 budget.7 That is admittedly a tiny drop in the bucket for California’s revenues; however, Becker’s activism may make sense more broadly considering the high-net-worth vulnerabilities built into the state’s revenue sourcing model. Taxes on personal income will make up over half of what California is bringing in for this budget year.8 Of this personal income tax stream, about half comes from those earning more than $1 million annually. Meanwhile those individuals make up less than 1% of those filing tax returns in the state.9 That means over a quarter of the state’s revenue is from earners like Ohtani, who have the financial engineering might behind them to pursue similarly evasive deals. Thus, California remains especially vulnerable to missing out when legal exemptions are accounted for to the fullest extent.
While Ohtani’s singular tax burden in any scenario would amount to a drop in California’s giant revenue reservoir (and those of the other states), the trend from within the MLB and the wider world of high earners may be that more drops keep leaking out. A year after Ohtani’s free agency ended with a bang, a new contract is getting the same kind of hype. Juan Soto, the Yankees’ super-slugger of last season, has become the latest highly sought-after free agent reportedly seeking a contract in the $600 million range, although without a hint of deferrals yet.10 If he can (and is willing to) get that much money up front, he’ll well surpass the Ohtani contract’s present value, and its tax burden as well. The free agency period leaves a lot of wiggle room in which more players could look to delay gratification and hold on for tomorrow to what they technically earn today. But it remains to be seen how Soto and future all-stars structure their contracts.
1 Taxes on some corporations, wealthy people unfairly low, Americans Say | Pew Research Center
3 Each state's tax rate can be found here: 2024 rates from the Tax Foundation.
4 Contract and tax values here are not subject to any present value discounting.
5 Bill Text - SJR-14 Deferred compensation.
6 CA SJR14 | 2023-2024 | Regular Session | LegiScan
7 Ebudget
8 Ibid
