Exploring luxury tax implications of Shohei Ohtani’s contract

Two-way superstar Shohei Ohtani rocked the baseball world by agreeing to a 10-year, $700M deal with the Dodgers. 

That record-setting contract, taken at face value, would have unparalleled impact on the club’s payroll as calculated for luxury tax purposes. If Ohtani’s contract indeed counted as a $70M hit to the club’s tax payroll, it would single-handedly push the Dodgers across the first level of the luxury tax even as the club sat at just $174M in payroll for tax purposes prior to the deal with Ohtani. While the big market Dodgers have never shied away from the tax in the past, paying into the tax during each of the past three seasons, the Ohtani deal would all but guarantee they would continue to do so for the next decade, leaving them vulnerable to escalating penalties.

As Jeff Passan of ESPN notes, however, the reported deferrals in Ohtani’s deal could lessen the tax burden on L.A. considerably. Passan notes that Major League Baseball applies a discount to deferrals in luxury tax calculations to determine the present-day value of contracts. Given the fact that “most of” Ohtani’s contract is expected to be deferred, Passan suggests that Ohtani’s deal, for luxury tax purposes, is expected to settle in the range of $40M to $50M when all is said and done. While those numbers aren’t final and won’t figure to become exact until the contract is properly finalized and announced, that range substantially alters the impact Ohtani will have on L.A.’s luxury tax bill over his decade-long tenure with the club.

After all, if Ohtani’s luxury tax hit for the 2024 season were to shrink from the $70M his on-paper AAV would suggest to a figure in the range of $45M, that would put the club’s luxury tax payroll at roughly $219M using the numbers supplied by RosterResource. For a Dodgers team that saw its luxury tax payroll land at $267M last year after peaking at $293M in 2022 (per Cot’s Baseball Contracts), that would leave the Dodgers with the ability to add upwards of $50M before matching their 2023 payroll for luxury tax purposes, and just under $75M in room before their hit their all-time high.

That’s great news for Dodgers fans, as the club has plenty of work to do in improving its roster even after adding a once-in-a-lifetime talent like Ohtani. Their new DH should complement Mookie Betts and Freddie Freeman well at the top of the lineup, but offense was never the primary concern of the Dodgers this winter. 

The club’s pitching staff was essentially middle-of-the-pack in 2023, with a 4.06 ERA that ranked 13th in the majors and a 4.23 FIP that ranked 15th. Looking ahead to 2024, the club’s only locked in starting pitcher is sophomore right-hander Bobby Miller. While he figures to be joined in the rotation by a veteran presence in the form Walker Buehler, Buehler hasn’t pitched in the majors since early 2022 due to the second Tommy John surgery of his career, casting doubt on his ability to be the durable, front-of-the-rotation arm that the Dodgers need.

While the Dodgers have been connected to plenty of top arms on the trade market this offseason, including Tyler Glasnow, Dylan Cease and Corbin Burnes, Ohtani’s relatively reasonable luxury tax hit should allow the club to be more aggressive when it comes to top-of-the-market options in free agency. The starting pitching market is of course headlined by NPB star Yoshinobu Yamamoto, for whom the Dodgers are considered to be a likely finalist. Looking beyond Yamamoto, the likes of 2023 NL Cy Young award winner Blake Snell and World Series champion Jordan Montgomery are still available. The market’s second tier of starting pitchers, meanwhile, includes interesting arms like Shota Imanaga, Marcus Stroman and Lucas Giolito. The addition of any of these arms would bolster the club’s rotation headed into 2024, and is made all the more feasible by the deferrals reportedly built into Ohtani’s contract.