I’m a day late on posting highlights of my weekly reading because I got sick Friday night and felt crappy until this morning, when I feel so-so.
Eric Boehm, “Baseball Star Shohei Ohtani’s New Contract Is a Massive Tax Avoidance Scheme. Nice!,” Reason, December 15, 2023.
Excerpt:
The 29-year-old Ohtani will collect $2 million in each of the next 10 years. The rest of Ohtani’s $68 million salary will be deferred for a decade, and the Dodgers will owe it to him in annual installments starting in 2034. By the time Ohtani collects the last of those payments in 2043, he’ll be 49 years old (and almost certainly well into retirement).
Because he’ll be playing most of his games in high-tax California, taking most of his pay via what’s effectively a fixed annuity gives Ohtani the possibility of avoiding some massive tax payments. “By the time he starts receiving the $68 million payments, he may be able to avoid state income taxes by living someplace like Florida without an income tax, or by moving back to Japan,” The Wall Street Journal reported this week.
Notice the word “avoidance,” not “evasion.” As far as I can tell, there is nothing illegal in this.
All of the $68 million that he doesn’t take immediately would have been taxed at a whopping 12.3 percent.
Steven Greenhut, “Why Are California’s Animal Shelters Killing So Many Pets?” Reason, December 15, 2023.
Excerpt:
Yet The Orange County Register‘s Teri Sforza reported on data analyzed by a former volunteer and found the “kill rate for adult dogs…has nearly doubled since 2018, and the amount of time they spend behind bars has jumped 60 percent.” During the pandemic, the shelter stopped walk-in visits and required appointments. That was understandable then, but even after the pandemic ended the shelter continued focusing on appointments and requiring accompanied visits.
Obviously, fewer people will fall in love with a purring or barking buddy if they can’t wander through the kennels and see which animal pulls at their heartstrings. You can no more pick out a pet based on a shelter’s photo than you can pick out a spouse solely on their dating website bio. Animal Care increased the number of walk-in visits amid criticism, but it’s still absurdly limited and I gave up trying to get info after a really long wait on its phone line.
The bureaucrats who run the facility—the largest municipal “animal-care” operation in the West—depict these customer-unfriendly, animal-harming policies as a means to protect the critters from stress and protect the public from animal bites. In reality, it’s just the latest instance of government putting the employees’ convenience above the public good—like the way public schools and teachers’ unions dragged their feet on school re-openings.
Adam N. Michel, “2026 Tax Increases in One Chart,” Cato at Liberty, December 12, 2023.
READER COMMENTS
Vivian Darkbloom
Dec 18 2023 at 7:19pm
I question the (unqualified) conclusion that Ohtani won’t be taxed by California if he receives those deferred payments after he ceases to be a California resident.
California, most other states and the US federal government reserve the right and actually do tax deferred compensation if that compensation is “sourced” to that taxing jurisdiction. By “source” it is generally meant where the services were performed that generated the income in question or income that was earned while a person was resident of the jurisdiction. At best, although not entirely clear, Ohtani could argue he’s not taxed on the pro rata share of the deferred compensation due to games played outside California.
For example, in an analogous situation, here’s California’s position on taxation of stock option income received after a person ceases to be resident of the state:
“Example
On February 1, 2007, while a California resident, you were granted nonstatutory stock options. You performed all of your services in California from February 1, 2007, to May 1, 2010, the date you left the company and permanently moved to Texas. On June 1, 2010, you exercised your nonstatutory stock options.
Determination
The income resulting from the exercise of your nonstatutory stock options is taxable by California because the income is compensation for services having a source in California, the state where you performed all of your services.”
The US federal government (subject to treaty rules) has a similar sourcing rule regarding income earned by non-resident “sportsmen and entertainers”.
https://www.irs.gov/individuals/international-taxpayers/taxation-of-foreign-athletes-and-entertainers
I recall, many years ago, a case involving Boris Becker. The issue was whether he had to allocate a portion of his sponsorship fees resulting from his wearing a sponsor’s logo on his tennis shirt at US competitions. Answer: the pro-rata share of that sponsorship income is subject to US tax. Income is allocated according to the number of days he played within and without the United States.
It could very well be that the arrangement has as much, or more, to do with the Dodgers attempt to avoid an annual MLB luxury tax, although that may be quite a stretch as well.
The first place I would turn to when seeking answers to complicated tax matters would not be an article written by a journalist for the WSJ or Reason magazine!
Austin
Dec 18 2023 at 7:26pm
It seems like Ohtani’s tax avoidance only works by claiming it’s “retirement income” and taking advantage of a federal law designed for pensions. I doubt California will let that go without a fight.
California has various “clawback” laws for deferred income. A common example for tech workers are stock grants spread out over 4 years. If you move to your company’s Washington office for years 2-4 they still claim those years as partially taxable in California.
Egregiously they double dip, too. If you work year 1 in Washington and years 2-4 in California they still lay claim to 100% of years 2-4.
Also the max income rate is currently 13.3%, not 12.3%.
David Henderson
Dec 18 2023 at 7:59pm
You write:
I had thought so too. But when I went to the Franchise Tax Board site, I found its claim that it’s 12.3%.
They lied.
I believe the Tax Foundation. It is, as you say, 13.3%.
Austin
Dec 18 2023 at 9:10pm
Technically the maximum “income tax” is 12.3%, but there is an additional 1% tax on income over $1 million.
Richard W Fulmer
Dec 19 2023 at 11:13am
I think it was American economist William A. Niskanen who said something to the effect that sooner or later, bureaucracies come to be run for the convenience of the bureaucrats.
Comments are closed.