HomeTrending MLB NewsWhy Ohtani’s contract structure is not a luxury tax dodge

Why Ohtani’s contract structure is not a luxury tax dodge

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On Monday, we learned that Shohei Ohtani’s $700M contract with the Dodgers has a stunning deferral structure: he’ll earn a mere $2M in each of the ten seasons he’s agreed to play baseball for the club, and then $68M per year from 2034-43.

Based on what I’ve seen on social media, a lot of baseball fans think the purpose of these deferrals is for the Dodgers to “dodge” the competitive balance tax (yes, t-shirts are already being drawn up.) Here’s why that’s wrong.

The collective bargaining agreement has a section for calculating the CBT hit for a contract that includes deferred money.  According to reports, that calculation works out to a $46M average annual value and accompanying CBT hit for the Dodgers and Ohtani.  As you can see here, $46M tops Max Scherzer’s previous AAV record of $43,333,333.33.  It’s $6M beyond Aaron Judge’s $40M AAV, which was the highest for a player on a deal of more than three years.

Not only is $46M a record AAV, but it’s entirely in line with expectations.  MLBTR predicted a $44M AAV for Ohtani. Most other prognosticators were in that range. The median Ohtani AAV prediction of the other six outlets we’re tracking was $45,984,849. It would be almost impossible for Ohtani’s luxury tax AAV to have met expectations any harder.

The problem is the initially reported $70M AAV. That was the first number people saw, and it gets ingrained in fans after being seen in thousands of headlines. The agent certainly didn’t mind.  Though news of significant deferred money quickly followed and ESPN’s Jeff Passan narrowed it down to $40-50M yesterday, more precise numbers weren’t known until today.

There was enough time for the shocking $700M and $70M figures to take hold.  So it’s logical for some fans to say the Dodgers are paying Ohtani $70M a year but “getting away with” just a $46M CBT hit.  However, I’d argue that the $70M figure was never “real,” in that it dwarfs expectations and there’s no current indication that any team offered anything close to that AAV without huge deferrals. The $46M AAV is what matters. Ohtani moved the AAV record forward as expected, but only by about six percent rather than an insane 62%.

MLB does have the power to stop teams from circumventing the CBT, but this doesn’t qualify. It is explicitly allowed. As Passan explained tonight, the CBA specifically says, “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.” This is just my opinion, but perhaps if the deferrals led to a luxury tax AAV below $35M or so on Ohtani, MLB might have considered it a tax dodge, but not for a record $46M.

Ah, but what about Jon Heyman’s report a year ago about how the Padres “were contemplating” a 14-year offer for Aaron Judge that would’ve taken him through age 44? About that, Heyman noted, “sources say they would not have been allowed, as MLB would have seen the additional years as only an attempt to lower their official payroll to lessen the tax.”

MLB would’ve been right — there would be no other reason to pay Judge through age 44. Teams are loathe to pay players that far into their careers, and of course the vast majority of players do not have MLB careers at age 44.  Our MLB contract tracker goes back to 10-1-10, and the only contracts of three or more years that even went through age 41 were for Albert Pujols and Yu Darvish.  So there’s simply no precedent for paying Judge three years longer than that. Furthermore, based on Heyman’s reporting, none of this happened: Heyman did not report that the Padres made a 14-year offer or that MLB tried to stop something.  Just that they would (I’d say “might”) have stopped it. As I was contemplating how long Ohtani’s contract might go, I think you could at least make a case to go through age 42.

All that said, Ohtani’s contract structure does present a big advantage to the Dodgers. I mean, they’re paying him $2M a year. Many arbitration-eligible utility players or relievers make more.  Paying Ohtani so little seems ludicrous in that sense, even if it is within the rules.  A team’s CBT payroll uses the average annual value of each contract, and that determines their luxury taxes.  But teams also operate off real payrolls, where a player on a two-year, $20M deal might be paid $5M in the first year and $15M in the second despite his $10M CBT hit.

The Dodgers have a certain budget or target with that real payroll, and instead of paying Ohtani $46M on that payroll, they’re paying him less than Austin Barnes. That means, in theory, the Dodgers can more easily afford to add more quality players, such as Yoshinobu Yamamoto.

So, is this a problem?  Does deferring 97.1% of a huge contract mean baseball is broken, and does it represent a major point of contention when the CBA expires after the 2026 season? Lindsey Adler of the Wall Street Journal wrote tonight, “According to league and union sources, MLB has proposed limiting deferrals in prior CBA negotiations, but the MLBPA has declined those limits because deferrals allow a player flexibility that allows a contract to be worth, let’s say, $700 million instead of $460 million.”

When this came up previously in CBA talks, it was probably more of a “nice to have” for MLB, but not something for which they’d concede the MLBPA.  The MLBPA won’t want to give this up, for the handful of players who want their payment deferred 20 years into the future.  As you know, money is worth more now than it is in the future, so players have not exactly been clamoring to wait until retirement age to receive 97.1% of their contract.  I’m sure deferred money will come up in the next CBA talks, and may even be eliminated, but one player doing it does not translate to a hot-button issue or something where billions of dollars hang in the balance.  They’ll find more consequential things to fight about.

Ohtani can do this because he is not a normal MLB player, and he rakes in significant endorsement money every year.  And as The Athletic’s Fabian Ardaya and Evan Drellich explain, Ohtani’s choice on deferrals gives the Dodgers payroll flexibility to add other players and may give him a tax benefit if he isn’t living in California when the $68M salaries start rolling in.

As Jack Harris of the L.A. Times notes, Ohtani “took this approach…with all the teams he negotiated with.”  Given that Ohtani’s contract roughly equates to a 10-year, $460M deal, I’d argue that he’s chasing rings a lot more than he’s chasing every last dollar.  Any team could have done this deal, but Ohtani wanted to play for the Dodgers.

The combination of Friday’s shaky reporting suggesting Ohtani was heading to the Blue Jays, plus an unprecedented contract structure, seems to be leading some fans to villainize him. I think that’s a shame because he has been squeaky clean off the field and remains a generational and thrilling player.

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