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How Homelessness, Taxes Impacted Deal for Baseball’s Top Free Agent – Pacific Research Institute

How Homelessness, Taxes Impacted Deal for Baseball’s Top Free Agent

Golden Gate bridge, San Francisco California stock photo

The biggest deal in Major League Baseball history was recently reached when the most coveted free agent in recent times, Angels player Shohei Ohtani, accepted a 10-year, $700 million deal to sign with the cross-town Los Angeles Dodgers.  In doing so, he spurned a similar offer from the San Francisco Giants.

You may think that taxes played the biggest role in Ohtani not signing with the Giants.  Think again.

In fact, San Francisco’s status these days as a not very desirable place to live, work, or play also played a major factor in the deal.

Giants legend and future hall of famer Buster Posey, who is now a member of the team’s executive board and was involved in the pitch to Ohtani, told The Athletic that homelessness and quality of life may have played an even bigger role than taxes:

Something that unfortunately keeps popping up from players and even the players’ wives is there’s a bit of uneasiness with the city itself, as far as the state of the city, with crime, with drugs.  Whether that’s all completely fair or not, perception is reality . . . Baseball is secondary to life and the important things in life.  But as far as free-agent pursuit goes, I have seen that it does affect things.

As evidenced by the City by the Bay cleaning its streets and moving the homeless in advance of China president Xi Jinping’s recent visit for the Apec summit, San Francisco has a huge quality of life problem that is pushing taxpayers, employers – and now athletes – away from the city.

This is not to say that taxes didn’t play a big role in Ohtani’s deal.

We’ve documented before how California’s most expensive-in-the-nation state tax burden puts our teams at a competitive disadvantage for landing the top players.  A professional athlete making $10 million in earnings would pay $800,000 more in taxes basing operations in California versus Florida.

On PRI’s Next Round podcast, we interviewed LPGA legend Dottie Pepper, who told us that taxes played a big role in her decision to locate in Florida while playing on the tour.  She also told us that the governors of New Jersey and Vermont would send the players letters when playing tournaments in their respective states that they better pay state taxes on their earnings there or else.

You may be asking yourself – how did taxes play a role when Ohtani went from one California team to another?

In a unique wrinkle, Ohtani chose to take only about $2 million per year of his $70 million annual salary, deferring the rest of the income 2034, when he would earn $68 million lump sum payments annually for another 10 years.

While baseball analysts say the move gives the Dodgers some flexibility in their payroll, there are also potential tax savings for Ohtani depending on where he locates starting in 2034.

According to The Athletic, the deal has “the potential to provide him some tax benefits — particularly if during the period he is drawing $68 million he is living in Japan, rather than California.”

Financial planner Jordan Gilberti told Business Insider that Ohtani “would have the freedom to move out of California after his Dodger days and reside in a low tax or tax-free state.”

“He could save more than 14% of those earnings after he’s actually done with his contract,” he says.

Not every player is going to be as financially savvy or patient to defer most of their compensation in a deal like Ohtani’s.  But the Ohtani deal, and the history of the Giants and other California-teams in losing out on the top free agents over the years, shows our teams must go to extraordinary lengths – including coming up with tax workarounds – to lure the best pro athletes to play here.

Tim Anaya is the Pacific Research Institute vice president of marketing and communications.

 

 

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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