Game-Changer: Shohei Ohtani’s Dodgers Move Sparks Luxury Tax Reform Talks
By Hunter Berry
Shohei Ohtani is, without doubt, this generation’s Babe Ruth or Jackie Robinson. The 29-year-old has made waves not only throughout the United States, but the world, for a feat few in baseball can achieve at the professional level: serving as a two-way player with the ability to excel as both a pitcher and a hitter. Despite the two-time MVP’s inability to pitch in the upcoming 2024 Major League Baseball (MLB) season due to a torn UCL and subsequent elbow surgery,[1] Ohtani recently signed with the Los Angeles Dodgers for a $700 million contract, valued at $70 million a year over 10 years.[2] This high-profile signing has not only amplified the Dodger’s World Series aspirations, especially when coupled with the recent signing of star pitchers Tyler Glasnow and Yoshinobu Yamamoto,[3] but also has ignited a fervent discussion about the MLB’s luxury tax system and how teams approach their financial strategies.
Specifically, The Dodgers’ acquisition of Ohtani has reignited debates over MLB’s Competitive Balance Tax (CBT), commonly known as the luxury tax.[4] The CBT was designed to maintain competitive balance by taxing teams that exceed a predetermined payroll threshold, and meant to prevent the wealthiest teams in the league, especially those in high-market areas like New York and California, from gaining an unfair advantage over smaller, more regional teams by spending exorbitant amounts on player salaries. Teams are charged if the average annual value of each player’s contract on the 40-man roster was more than the threshold set for that year, and the tax can increase if teams exceed the balance multiple years in a row or exceed the threshold by extreme amounts.[5] Clubs can even have certain draft picks moved back if they are too far above the threshold.[6] In addition to these penalties, the luxury tax also works as a revenue sharing system, wherein the small-market and low-payroll teams receive funding from the luxury tax revenue, allowing them to invest in more talent.[7]
In 2023, eight teams exceeded the $233 million threshold set, combining for almost $210 million in tax revenue.[8] This includes roughly $20 million from the Dodgers, a “three-time payor” that has frequently gone over the threshold in recent years.[9] For the 2024 season, the Dodgers are estimated to be in the fourth tier of the luxury tax threshold, and are set to incur a tax of 110% on everything they spend over the fourth tier threshold of $297 million, alongside the $41 million owed in taxes for fees between the first and third tiers.[10]
It’s no longer a matter of if the Dodgers will pay the luxury tax, but how much tax they will pay for the foreseeable future.[11]
As is evident, then, the Dodgers, alongside numerous other teams, have shown a willingness to spend big and exceed the luxury tax threshold to construct a star-studded roster, and are willing to endure the additional fees and draft pick penalties to do so. As such, some critics argue there are insufficiencies in the current tax system, demonstrating an inability to level the playing field in any significant way. Wealthy teams, like the New York Yankees, New York Mets, and the Dodgers, can effectively absorb their penalties without significant repercussions, allowing them to sign long term extensions or recruit free agents at rates that are unstainable and sometimes even unachievable for smaller-market teams.[12] Despite last year’s World Series lineup that did include a small-market team in the form of the Arizona Diamondbacks,[13] many fear that this imbalance will lead to a less competitive league where the same five to ten teams dominate year after year.[14]
One possible solution to fix some of the current issues associated with the luxury tax is to implement a “floor system.” A floor system would effectively require each team to maintain a minimum payroll, forcing some of the leagues’ more frugal owners to invest more in their teams, or risk being forced to sell. While this could eliminate some challenges around teams “tanking,” and ensure a more competitive league, it could negatively impact some teams who are simply unable to make the payroll minimum and could lead to inflated player salaries. Other, more simple, solutions, could include implementing hard salary caps, like those in the National Basketball Association (NBA) and the National Football League (NFL), or to increase the revenue sharing aspects of the luxury tax, redistributing higher revenue proportions to smaller teams in the hope of greater talent investment. Potentially, the MLB could even simply increase the tax for repeat offenders, forcing teams like the Dodgers and the Philadelphia Phillies to pay significantly higher taxes that may actually impact their behavior.[15]
On the other hand, the MLB could take a deeper look at the luxury tax system and implement a set of more complex, potentially even radical, changes to the system. For instance, some have argued that the MLB could tie to luxury tax threshold to a percentage of league revenues, ensuring that the threshold grows in tandem with the league’s overall finances, as opposed to being manually set each year.[16] This could, if implemented successfully, narrow the gap between big and small-market teams, increasing the spread of talent and creating a more competitive league.
In more recent debates after the Ohtani signing, there has even been calls for changes to how contract deferrals work and interact with the luxury tax system. Of Ohtani’s $700 million contract, $680 million is set to be deferred and paid out to Ohtani after his contract ends.[17] Ohtani will be paid $2 million a year from now until 2033, and the team will pay Ohtani $68 million a year from 2034 to 2043, bringing down the team’s luxury tax hit from $70 million a year to $46 million a year.[18] While deferrals themselves are nothing new, no deferral in MLB history has been anywhere close to Ohtani’s. While some respect Ohtani for being willing to sacrifice immediate gain for the chance to help his new team build a star-studded roster, others fear that this tactic gives wealthier teams yet another weapon in their arsenal, allowing them to sign stars while lowering their CBT obligations. As such, there are arguments that deferred contracts should be accounted for more in luxury tax calculations, ensuring that the tax more accurately reflects a team’s overall financial obligations.
For the Dodgers, Ohtani’s signing represents a clear message: they are in relentless pursuit of glory, with their eyes set on repeating the 2020 season that netted them a World Series championship,[19] regardless of the cost. While Ohtani’s signing, on top of the Dodgers’ other offseason recruitments and preexisting star power, undoubtedly makes the team a juggernaut in the league, it also serves as a catalyst for challenges to the current luxury tax system, prompting a discussion of how competitive balance is maintained in “America’s pastime.” As the 2024 season approaches, with spring training set to begin in just two months, all eyes will be on Ohtani and the Dodgers, not just for their performance on the field, but for the lasting impact their actions could have on the baseball’s financial systems and competitive balance.
Hunter Berry is a 3L at Vanderbilt University Law School. He currently serves as the Technology Editor for the Journal of Entertainment and Technology Law and will practicing patent prosecution after law school. Prior to law school, Hunter graduated from Berry College with majors in computer science and political science, alongside a minor in economics.
[1] See Rory Carroll, Ohtani Has Elbow Procedure, Won’t Pitch Again Until 2025, Reuters (Sept. 19, 2023), https://www.reuters.com/sports/baseball/ohtani-has-elbow-procedure-wont-pitch-again-until-2025-2023-09-19/.
[2] See Evan Drellich, Shohei Ohtani’s Impact on the Dodgers, The Athletic (Dec. 21, 2023), https://theathletic.com/5153421/2023/12/21/shohei-ohtani-dodgers-contract-deferrals-silicon-valley/.
[3] See Matt Levine, Tyler Glasnow Has High Praise for New Dodgers Teammate Yoshinobu Yamamoto, Sports Illustrated (Dec. 25, 2023), https://www.si.com/mlb/dodgers/news/tyler-glasnow-has-high-praise-for-new-dodgers-teammate-yoshinobu-yamamoto-ml0802.
[4] See Competitive Balance Tax, Major League Baseball, https://www.mlb.com/glossary/transactions/competitive-balance-tax.
[5] Id.
[6] Id.
[7] Id.
[8] Mark Polishuk, Eight Teams Combine For Record $209.8MM In Luxury Tax Bills, MLB Trade Rumors (Dec. 23, 2023), https://www.mlbtraderumors.com/2023/12/eight-teams-combine-for-record-209-8mm-in-luxury-tax-bills.html.
[9] Id.
[10] Eric Stephen, Dodgers will be luxury tax payers for a while, True Blue L.A. (Jan. 8, 2024), https://www.truebluela.com/2024/1/8/24029828/dodgers-payroll-competitive-balance-tax.
[11] Id.
[12] Out of 30 MLB teams, only 7 teams currently have a 2024 payroll of more than $200 million. On the other hand, there are smaller market teams, like the Pittsburgh Pirates, who’s current 2024 payroll is only $75 million. Four other teams currently have a payroll under $100 million, and eleven (total) have a payroll of under $125 million, a threshold still $20 million less than the league average. For perspective, paying one year of Ohtani’s contract, without deferrals, would cost more than the entire current Oakland Athletics 2024 payroll. See MLB Team Payroll Tracker, Spotrac, https://www.spotrac.com/mlb/payroll/ (last visited Jan. 20, 2024).
[13] Complete 2023 MLB postseason results, MLB (Nov. 1, 2023), https://www.mlb.com/news/2023-mlb-playoff-and-world-series-schedule.
[14] Market Size Matters: Luxury Tax’s Impact on Teams in Different Markets, FasterCapital (Dec. 22, 2023), https://fastercapital.com/content/Market-Size-Matters–Luxury-Tax-s-Impact-on-Teams-in-Different-Markets.html#The-Impact-of-the-Luxury-Tax-on-Small-Market-Teams.
[15] The Dodgers, alongside the San Diego Padres, are three-time payors, meaning they have paid the tax and exceeded the luxury tax threshold at least three years in a row. The Phillies, alongside both the Yankees and Mets, are two-time payors as well. See Polishuk, supra note 8.
[16] See generally Tim Dierkes, How the MLB Luxury Tax Thresholds Have Changes By Year, MLB Trade Rumors (Dec. 2, 2021), https://www.mlbtraderumors.com/2021/12/how-the-mlb-luxury-tax-thresholds-have-changed-by-year.html; Travis Sawchik, MLB’s luxury-tax proposal is trying to squeeze a cap on salaries, The Score (2022), https://www.thescore.com/mlb/news/2298659.
[17] Darragh McDonald, Shohei Ohtani’s Contract Will Defer $68MM Per Year, MLB Trade Rumors (Dec. 11, 2023), https://www.mlbtraderumors.com/2023/12/shohei-ohtanis-contract-will-defer-68mm-per-year.html.
[18] Id.
[19] The Dodgers have made it to the postseason every year since 2013, including two other World Series appearances in 2017 and 2018. See Los Angeles Dodgers Postseason Results, MLB (2023), https://www.mlb.com/dodgers/history/postseason-results. However, in this time, the Dodgers have only achieved one World Series championship, in 2020, which featured a shortened season of only 60 games due to the COVID-19 pandemic. See Erin Walsh, Giants Appear to Troll Dodgers with Mickey Mouse Ears Fan Giveaway for 2024 Game, Bleacher Report (Jan. 18, 2024), https://bleacherreport.com/articles/10105715-giants-appear-to-troll-dodgers-with-mickey-mouse-ears-fan-giveaway-for-2024-game. Some see the Dodgers’ win as somewhat illegitimate, due to the shortened season, a number of players around the league opting out for the season, and the team never playing against homefield advantage in the World Series. See id. As such, the Dodgers are still looking for a full-season championship, which would be the team’s first since 1988. See Dodgers Postseason Results.