Photo Credit: CNBC https://www.cnbc.com/2025/03/01/dodgers-deferred-salaries-spark-mlb-salary-cap-questions.html
Can you imagine someone owing you in excess of $100 million dollars? And can you imagine having to wait almost a decade to see that money? Well, it happens all the time in Major League Baseball.[1] And not everyone is happy about it. Teams use this method to manipulate the salary cap and avoid paying a luxury tax for exceeding the cap each season.[2] “For luxury tax purposes, a team’s payroll is calculated by summing the average annual values of each contract, according to MLB’s current collective bargaining agreement. For contracts with deferred salary, that number typically turns out smaller than if the pay wasn’t deferred, so teams can use the practice to lower their tax bills.”[3]
The luxury tax is intended to try and bring competitive balance to the major leagues so that smaller market teams, such as the Pittsburgh Pirates, Cincinnati Reds, or Kansas City Royals could theoretically compete with big market teams such as the New York Yankees or the Los Angeles Dodgers. These teams have billions of dollars in revenue each year from large media contracts and could in essence buy a championship if they wanted to by overpaying all of the top talent in the league from the media rights deals.[4] One way for the big market teams to get around the tax is to defer the large contracts of their star players, which is how the Los Angeles Dodgers have deferred over $1 billion to seven players over the next twenty years, including to phenom Shohei Ohtani, allowing them to build a super team.[5] The most famous example of teams doing this is “Bobby Bonilla Day”, which happens every July 1st.[6] The New York Mets deferred $5.9 million of former player Bobby Bonilla’s contract and agreed to pay it as an annuity from 2011-2035 in installments of ~$1.1 million per year.[7] He hasn’t played baseball since 2001.[8] Part of this was just bad decision making and management of former owner Fred Wilpon, who lost nearly $150 million to Bernie Madoff’s Ponzi scheme.[9] From the player’s perspective, salary deferrals are a smart idea because it is kind of a way of saving without thinking about it. But many teams see it simply as gaming the system to create a dynastic team that will perch it atop the league for years to come.[10]
There are sure to be discussions about contract deferral in MLB’s next collective bargaining agreement, which is up for negotiation in 2026.[11] Part of the reasoning for limiting deferrals is that it can put an entire team in financial turmoil, as it did with the Arizona Diamondbacks in 2001, when a large portion of its deferrals all came due at the same time.[12] This can put the club in such a precarious position it may need a financial bailout from the league, or potentially fold completely. There are also tax consequences of deferrals, as state governments cannot collect taxes on what is technically unearned income, essentially creating a tax loophole for players and teams.[13] Players like Ohtani could move from a high-tax state such as California right after retirement to a low tax state such as Florida or Nevada, and California would never see ~$90 million that it would have otherwise collected had he collected his paycheck while he was still playing and living in California. There are efforts in state legislatures to try and close this loophole, but right now it is just a swing and a miss.[14]
[1] https://www.cnbc.com/2025/03/01/dodgers-deferred-salaries-spark-mlb-salary-cap-questions.html
[2] Id.
[3] Id.
[4] Id.
[5] https://www.espn.com/mlb/story/_/id/42760649/dodgers-deferred-payments-top-1-billion-7-players
[6] https://www.foxsports.com/stories/mlb/what-is-bobby-bonilla-day-explaining-new-york-mets-ongoing-payout-saga
[7]Id.
[8] Id.
[9] https://www.espn.com/mlb/story/_/id/40430232/bobby-bonilla-day-2024-new-york-mets-pay-119-million-every-july-1-ohtani-contract-deferred-money
[10] See supra note 1.
[11] Id.
[12] Id.
[13] Id.
[14] Id.
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