State Controller Cohen Calls For Congress To Look Into Sports Deferral Loopholes

California State Controller Malia Cohen called on Congress Monday to stop a tax break loophole and limit deductions and exemptions for high income earners following the recent $700 million record-breaking signing of baseball star Shohei Ohtani by the Los Angeles Dodgers.

Ohtani, a Japanese player who first began his MLB career for the Los Angeles Angels in 2018, proved his dominance in the sport shortly after beginning for the Angels. In only six years, he has already won two MVP awards, a Rookie of the Year award, and has been part of three all-star games. He is also a rare pitcher-hitter combination, making him sought after by other teams for years.

Because of the Angels remaining largely uncompetitive for years and with his contract up at the end of the 2023 season, multiple teams, including the Dodgers, New York Yankees, and San Francisco Giants, all courted Ohtani.

After months of speculation, Ohtani finally signed with the Dodgers last month in a record-breaking 10 year, $700 million deal. According to his contract, he will be deferring $68 million out of the $70 million he is to make each year, or will be owed $680 million following the end of his contract. The deal is also the largest in sports history, breaking the 2019 12-year $426 million contract that former Angel teammate Mike Trout agreed to, as well as the $674 million deal that a Spanish soccer club paid to Argentinian player Lionel Messi.

However, Ohtani’s use of deferrals also manages to avoid many taxes, including the baseball luxury tax known as the competitive balance tax (CBT). With Ohtani making far less each year with deferrals, both he and the Dodgers save tens of millions. Both the team and Ohtani have said that the deferrals were agreed to to open up for money for the team to hire better players and stay competitive. However, the state could lose out on a lot of money as well. For example, if Ohtani moves out of state or back to Japan before he is to get the rest of his $680 million ten years from now, California would lose out on approximately $98 million.

With Ohtani’s contract, and other deferral contracts like it, costing the state tens of millions, Controller Cohen announced on Monday that she will be asking Congress to look into these loopholes.

“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,” said Cohen on 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.

“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. 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.”

Questions over the $700 million contract

As of Tuesday, there has been no Congressional action on this. However, experts note that it is unlikely that the deferrals tax issue will be acted upon because of it affecting every state in the nation.

“This issue has come up before,” said lawyer Alan Bream to the Globe on Tuesday. “Cohen isn’t the first person to want something to be done about this. But this is quickly becoming common practice and risks making the team upset. Also, yes, the state misses out on that tax, but by having more money and being able to get such a popular player, there is a lot in tax revenue coming California’s way because of this. High secondary ticket prices, more spending at ballparks, more spending on merchandise, the team ultimately paying more taxes due to being evaluated as being worth more. California is still making a ton on this. And if they close the option of deferrals it can hurt teams as well as all those other forms of tax revenue that not only the state misses out on, but the city and the county.”

“Cohen really can’t see the forest through the trees on this one. Also, this is all on if Ohtani decides to move a decade from now. He has a home and everything here, and he says he loves it out here. It doesn’t look likely.”

Others also alleged that Cohen was not being completely sincere in her actions on Monday, largely because of where she is from.

“Cohen is from San Francisco,” added Anita Peck, a researcher into the dynamic between politics and sports. “That’s the home of the Giants, who are a rival to the Dodgers. Who was the team that lost the contract to Ohtani and the Dodgers? The Giants.”

“This is all alleged still, but if she wants to be cleared of favoritism here, she needs to say that she is not a Giants fan, or her calls to Congress should be entirely withdrawn. There have been political plays in the past circled around sports and sports rivalries. There have been Senators that forced leagues to expand the number of teams quickly to get a team in their city under threat, like what Senator Stuart Symington did with the Kansas City Royals in the 60’s. And others have used team favoritism to force over a lot of laws and things like that.”

“Again, this ais all just alleged with Cohen here, but it looks highly suspicious. She needs to make it clear if she is a fan of the team and if that played any part whatsoever in this decision.”

More on possible Congressional action on the deferral loophole is to likely come out soon.