Philly Front Office

UPDATED: Math is hard.

Finally, STUFF! Overnight the Dodgers flexed their Gugenheim dollars and signed Blake Snell to a 5 year, $182m contract. Pearls were clutched far and wide as the rich get richer. Snell is good and he joins Ohtani, Yamamoto, Tyler Glasnow, and presumably Roki Sasaki in a STACKED rotation that might go a few games without getting hurt.

As is becoming common in Los Angeles, this is not a normal deal. Instead of a straight $36.8m spread across those 5 years, $62m of this contract is deferred and $52m is a signing bonus. This has a 2 part effect of limiting the amount of money to be spent over the next 4 years as well as lowering their luxury tax number.

When Shohei Ohtani signed a 10 year, $700m contract with Big Blue last winter, he basically signed 2 separate deals. The first was a 10 year, $20m contract and the second was a 10 year, $680m contract to follow right after. This is blatant salary cap manipulation and likely legal tax evasion. Because of the structure, the Dodgers are paying very little out of pocket over the life of the deal, just $2m per season. This lets them pay his buddy Yamamoto and now Snell.

Snell only agrees to big deferrals because he is getting that $52m up front as well as the year’s salary. So outside of the big cash payment this year, this deal is only costing the Dodgers $13.6m in real dollars for each of the next 4 years. That’s nothing. That means Snell and Ohtani cost out of pocket $15.6m for each of the next 4 years. Combined that ranks as the (scrolling, scrolling…) 91st highest salary in the league, right below Jeff McNeil.

Let’s talk about those deferrals. Ohtani’s deal doesn’t simply disregard that other $680m to be paid in the 2030s and 40s. Instead of counting as $70m yearly, it gets lowered to $46m per year. This is considered the “present value” of the contract. The same will happen with Snell. His contract is smaller and with less deferred money, but reports say he will count as $32m per season instead of almost $37m.

Now who’s ready for some math!!!

That $5m difference is much bigger than it seems. The Cohen tax level (level 4) is set at $301m this year. Overages at that level are taxed at 60% and have their first round pick moved back 10 spots. Without deferrals, their tax bill on just this contract would be something like $38.7m (which is in addition to the $36.8m pay). Two things are possible here. If they go past the 4th level, their tax bill will be much higher depending on total payroll. However, if they operate just below the 4th level, which it is looking like the plan here, their tax bill is around $30m. So instead of $75.5m out of pocket this year and probably more than that for the next 4 years, they will be paying $95m out of pocket this year, but less than $43m for the next 4. That’s a $110.5m savings.

A couple final points here. Money now is worth more than money later. The Dodgers are going to earn real money now on jersey and ticket sales that they can put toward paying Ohtani and Snell later. They don’t get interest on their deferred payments. Inflation will make their pay less, not the Dodgers earnings. Also, Los Angeles California has some serious taxes. Places like Washington, Texas, and Florida do not (I don’t know about Japan and international tax law, sorry). I bring up Washington because that is where Snell lives at the moment. His $52m signing bonus (and likely his $62m in deferrals) will be taxed much differently than his $13.6m salary. If Ohtani plants himself in a similar state with no state income tax, his $680m deferred money will also be taxed much differently than his $2m per year salary. This ends up a huge savings for them. What used to be an advantage for certain teams in certain states, the Dodgers have found a way to nullify. They are very good at this.

Hey, at least he’s not a Met.