[Despite growing profits, casino operators used predictions of
“grave danger” to convince the state to slash their tax burden,
denying millions to the city, its school district and the county.]
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CASINOS PLED POVERTY TO GET A HUGE TAX BREAK. ATLANTIC CITY IS PAYING
THE PRICE.  
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Alison Burdo
June 2, 2022
ProPublica
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_ Despite growing profits, casino operators used predictions of
“grave danger” to convince the state to slash their tax burden,
denying millions to the city, its school district and the county. _

Gleaming casino towers dot the Atlantic City boardwalk, Kriston Jae
Bethel, special to ProPublica

 

_ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign
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_This article was produced for ProPublica’s Local Reporting Network
in partnership with The Press of Atlantic City. Sign up for
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stories like this one as soon as they are published._

Last fall, amid the second year of the pandemic, Atlantic City’s
casino executives painted a dire picture for New Jersey’s
Legislature. Their brick-and-mortar properties were struggling. And
despite thriving online gaming businesses, casinos said they were
losing most of that revenue to companies that operate the internet
gambling sites.

If policymakers didn’t cut casinos’ tax burdens, industry leaders
forecast “grave danger” ahead. The state Senate president went
further, warning that four of the city’s nine casinos could close.

The pitch worked. Fearing closures and layoffs, legislators moved
quickly to deliver tax relief, few questions asked. “All good by
me,” said Gov. Phil Murphy, who signed it
[[link removed]] on Dec. 21, one
day after both chambers passed it.

The legislation altered the formula that determines how much casinos
pay the city, its school district and the county to operate. And under
the changes, companies will collectively pay those entities $55
million less than they otherwise would have this year — cuts that
will disproportionately impact Atlantic City, the distressed capital
of the state’s gaming industry.

The problem? Although the casinos cried poor, business is back
[[link removed]].
[[link removed]]

As they pushed for tax relief, gaming companies were already on the
rebound from the pandemic slump, recording profits above 2019 levels.
The casinos’ parent companies were also spending billions of dollars
to purchase online gaming companies, acquisitions that will help
assure them more revenue from online wagers, according to a Press of
Atlantic City and ProPublica review of state and federal financial
filings, as well as public statements by casino representatives.

The industry in Atlantic City reported roughly $767 million in gross
operating profit in 2021, its best year in more than a decade. But, as
a result of the change in the law, it will pay $110 million in a key
local tax — the smallest amount in the history of the five-year-old
levy and $20 million less than the year before. (See how we calculated
casinos' tax burden
[[link removed]].)

“How do you do a tax decrease of that magnitude while they’re
registering those kinds of profits on their books?” said Jim
Kennedy, former executive director of the Casino Reinvestment
Development Authority, the state agency that oversees the investment
of gaming tax revenue for economic development projects.

The debate centers around a taxing program known as PILOT, or payment
in lieu of property taxes. The plan was adopted in 2016 to resolve the
costly fights that casinos waged with Atlantic City to dispute their
property assessments, battles that nearly bankrupted the city.
Instead, each casino now pays a share of an industrywide assessment
calculated based on the prior year’s total gaming revenue. Since the
system was implemented, Atlantic City has received the largest share
of PILOT, with payments making up about a third of the city’s annual
budget. But this year, the casino companies didn’t want to see their
PILOT levies rise, in part because a separate tax break was
simultaneously expiring.

The upturn in business for the casinos contrasts sharply with the
reality of Atlantic City, which has been struggling to emerge from
near financial ruin since 2016, when New Jersey imposed a state
takeover. This year, at a time of high inflation and rising costs, the
city of 38,000 estimates it will get $91.7 million from local taxes on
casinos, $5 million less than it did last year. That might not sound
like a lot of money for a city, but leaders had expected this year’s
casino tax revenues to rise compared to last year. In fact, had
lawmakers not changed the tax law, Atlantic City would have seen $133
million this year — $41 million more than the city is actually
getting, according to state
[[link removed]] and city
projections
[[link removed]].

And by most metrics, Atlantic City needs the cash.

More than a third of its residents, who are mostly Black and Hispanic,
live in poverty. Its infant mortality rate is alarmingly high
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and its children have higher levels of lead in their blood than kids
almost anywhere else in New Jersey
[[link removed]],
according to the most recent state reports. In the shadow of the
gleaming casino towers that dot its famous four-mile boardwalk lies a
single full-service grocery store.

Atlantic County, which has one of the highest foreclosure rates
[[link removed]]
in the nation, could also feel the pinch. The new tax formula will
result in approximately $19.3 million less than expected coming to the
jurisdiction over the next five years, county estimates show. County
officials, who are suing the state to maintain their share of tax
revenue, say the reduction will hinder several public health programs
and services for veterans, seniors and disabled residents.

For its part, the industry defends the new law.

Joe Lupo, head of the Casino Association of New Jersey and president
of Hard Rock Hotel & Casino Atlantic City Credit:Edward Lea/The Press
of Atlantic City

In response to our reporting, Joe Lupo, head of the Casino Association
of New Jersey and president of Hard Rock Hotel & Casino Atlantic City,
said the soaring revenue figures give a distorted picture of the
industry’s health because its online partners get a large chunk of
the money from internet gaming. “Failing to adjust the PILOT would
have resulted in egregious, inappropriate, and inequitable taxes for
any industry, let alone an industry that is still fighting to recover
from COVID-19,” the group said in a statement.

The industry’s most recent financial reports, released by state
regulators last month, show revenue from in-person gambling has
surpassed pre-pandemic levels.

MGM Resorts International, the parent company of the Borgata Hotel
Casino & Spa, the market leader in Atlantic City, also defended the
changes to PILOT. “We take our position as a large employer and
community leader seriously and have devoted significant efforts and
resources to Atlantic City’s economic success and future,” a
spokesperson said in a statement. “Our priority when it comes to
taxation is ensuring it’s structured so that each operator is
contributing its fair share.”

Former state Sen. Steve Sweeney, the South Jersey lawmaker who led the
legislative push last year, stood by his actions. “Casinos would
have closed,” he said in an interview. “We did the best we could
in a bad situation. We saved Atlantic City, we got it back on its
feet.”

Murphy, through a spokesperson, declined to comment.

For local and state officials, though, the new PILOT law has renewed
questions in a long-running debate about whether Atlantic City is
being shortchanged, despite policymakers’ promises from more than
four decades ago that legalized gambling would help revitalize the
beleaguered community.

“There is a difference between being a good partner and getting
taken advantage of,” said City Councilman Jesse Kurtz, a Republican
representing the 6th Ward, who opposed the legislation.

A New Tax System for Atlantic City

A vacant lot. Atlantic City has seen limited investment in
infrastructure and services while casinos have sought to reduce taxes
owed to the city. Credit:Kriston Jae Bethel, special to ProPublica

Since the first New Jersey casino opened in Atlantic City in 1978, the
city’s fortunes have been tied to gaming. The industry expanded
rapidly, growing to a dozen properties, nearly all along the city’s
world-famous boardwalk, and recording year-over-year gains for nearly
30 years. Taxes on casino operations, as well as related fees, sent
billions to the state. Money also flowed directly to Atlantic City in
two other forms: property taxes, which became the single largest
source of municipal revenue, and another tax dedicated to financing
community projects. The latter levy, known as the investment
alternative tax, or IAT, was created in 1984 to ensure the industry
invested in Atlantic City amid concerns that casinos were bilking the
city.

But, over the past decade and a half, a slew of challenges upended the
industry’s growth: the global financial crisis in 2008, Superstorm
Sandy in 2012 and the expansion of legalized gambling in nearby
states. As casino revenues dropped, gaming companies began
successfully challenging their property tax bills. County records show
their collective property valuation plunged from a high of $13.7
billion in 2008 — when 11 casinos were open — to $3.2 billion in
2016 — when only seven properties were operating. As a result, local
tax revenue plummeted and municipal debt ballooned, mostly to cover
the costs of property tax refunds owed to casinos. (Today, about
two-thirds of Atlantic City’s $456 million debt burden comes from
bonds sold to cover those refunds.)

That debt limited the city’s ability to invest in infrastructure and
services, including its fire department, which has been borrowing
neighboring communities’ trucks while awaiting new equipment. The
city also reduced the size of its police force, cutting dozens of
officers.

With the city on the brink of insolvency, gaming companies hatched an
alternative tax plan, pitching it for several years before it gained
enough support in Trenton to pass in 2016. For the next decade,
instead of paying traditional property taxes, casinos would make
payments based on other factors, including how many hotel rooms they
have and their gross gaming revenue.

A billboard for Caesars Sportsbook, a gaming app, sits atop a corner
market. More than a third of Atlantic City’s residents live in
poverty. Credit:Kriston Jae Bethel, special to ProPublica

The legislation, drafted in part by the Casino Association of New
Jersey, set the collective amount due in 2017 at $120 million, and for
each of the remaining nine years, it tied the total PILOT payment to
industry performance: If the industry saw a drop in revenue, payments
would also decline.

For the businesses and Atlantic City, the new system held clear
advantages. Casinos would no longer challenge their property taxes in
court, saving both sides time and money. And they could bank on
predictability, penciling in the amounts owed for each of the next 10
years.

The 2016 legislation also included a separate tax break for gaming
companies, an incentive to convince all the casinos to participate in
the PILOT system. It gave casinos a discount on the investment
alternative tax that they paid to finance community projects. The
change would hurt Atlantic City in the short term, but lawmakers
ensured that the cuts wouldn’t last forever: The tax break would
expire halfway through the PILOT program, with the city seeing the
full tax benefit again in 2022.

Then-Gov. Chris Christie signed the PILOT bill into law
[[link removed]] in 2016.
Seeking to avert New Jersey’s first local government bankruptcy
since 1938, he also placed Atlantic City under state control — a
move that gave the state authority over large parts of local
government, including its budget.

But the bad times didn’t last for the casinos. Two shuttered
properties, the Trump Taj Mahal and the Revel Casino Hotel, changed
ownership and then reopened in mid-2018 as the Hard Rock and the Ocean
Casino Resort, respectively. Meanwhile, online gaming blossomed,
injecting hundreds of millions of dollars into the industry. Legalized
in 2013 — with the requirement that computer servers be based in
Atlantic City — the sector nearly quadrupled its revenues in New
Jersey in just six years, growing from $123 million to $483 million in
2019. The climb accelerated in the back half of 2018, aided by the
legalization of sports betting in the state.

Rolling carts outside Bally’s Casino, whose parent company has spent
billions since 2020 to build out its online gaming business. The
success of online gaming has injected hundreds of millions into the
industry. Credit:Kriston Jae Bethel, special to ProPublica

As a result, gross gaming revenue climbed in 2018, and then again in
2019. So did the PILOT payments, which reached $152 million in 2020,
far more than the initial $120 million, which the industry had
expected to be a kind of ceiling.

At the same time, the temporary break on the investment alternative
tax was scheduled to expire, meaning companies would have to begin
paying their full share again in 2022.

To some industry leaders, the PILOT program was starting to look like
a bad bet.

They turned to a key ally.

Gaming Industry Pushes for Change

For more than a decade, Steve Sweeney lorded over New Jersey politics
as the president of the state Senate. Long considered the
second-most-powerful person in the state, behind the governor, the
South Jersey Democrat brokered deals on everything from schools to
public pensions to renewable energy.

But last year, amid a Republican wave, he met his political end in a
stunning upset, falling in the November election to a little-known
truck driver with no political experience. With only months left in
his post, he returned to Trenton to address unfinished business. On
his agenda: tax relief for the gaming industry.

Specifically, Sweeney had sponsored legislation
[[link removed]] to exempt all
online gaming revenue from the PILOT formula.

Then-state Sen. Steve Sweeney at a news conference in Trenton on Nov.
10, 2021. Before he left office, he pushed for tax breaks for
casinos. Credit:Matt Rourke/AP Photo

The bill was a response to industry leaders, who had spent months
publicly downplaying their online windfall. Hard Rock’s Lupo led the
effort, making a key claim: that casinos’ technology partners were
gobbling up the bulk of online wagers.

In general, a spokesperson for the Casino Association of New Jersey
said, just 20% to 25% of the total online revenue in New Jersey was
attributable to casinos’ own platforms. But, according to the Press
of Atlantic City/ProPublica review, that number is poised to rise over
the course of the PILOT program, as gaming companies increasingly make
moves to reduce or eliminate third-party costs
[[link removed]].

At a press conference in late November, Mayor Marty Small of Atlantic
City backed the industry’s push to change PILOT.

“We’re guaranteed to be in no worse position than any previous
year,” Small said.

At his side was his adviser, Steven P. Perskie, a former judge and
onetime state lawmaker who authored the Casino Control Act legalizing
gaming in Atlantic City. Perskie cited what he called a
“comprehensive” financial analysis of PILOT taxes conducted by the
state. “The impact of the increases that would take place in 2022
would put a significant portion of the industry in extreme financial
distress,” he told reporters.

The new PILOT bill would help prevent that, Perskie said.

To be sure, the change would mean less in PILOT funds for Atlantic
City. But the mayor reasoned that the loss would be offset by an
increase in investment alternative taxes; the break that casinos had
received on the levy would sunset as planned in 2022. But Small’s
prediction would ultimately turn out to be wrong. The city’s
proposed annual budget shows that this year, the two revenue streams
combined are expected to total $5 million less than in the prior year.

Small did not respond to a request for comment, and Perskie declined
to answer written questions from the news organizations. Neither
provided evidence of the PILOT analysis they cited.

But as the legislation moved through the statehouse, other local
officials, like Dennis Levinson, Atlantic County’s executive, took
notice of the new financial reports being released by the Division of
Gaming Enforcement, the state agency responsible for regulating
casinos.

While the city’s nine casinos saw a 5% drop in in-person wagers
through the first 10 months of 2021 compared with the same period in
2019, online gaming had pushed their gross revenue to $3.5 billion. In
terms of gross operating profit — which regulators describe as “a
widely-accepted measure of profitability” — the industry reported
$592 million through the first three quarters of 2021, putting it on
pace for its best year in at least a decade.

Citing the gaming reports, Levinson asked Murphy to oppose the PILOT
legislation.

“It is confounding that the casinos can claim they are suffering
while all reports indicate they are setting revenue records,”
Levinson wrote in a Dec. 2 letter. That same day, Moody’s Investors
Service issued a credit opinion of Atlantic City that said, “City
management is not aware of any plans to close further casinos.”

In his letter, Levinson also said changing the tax formula would
violate a previous settlement agreement with the state that spelled
out how much PILOT tax revenue Atlantic County would receive through
2026 — and he threatened to sue if the bill became law.

Levinson said the governor never responded. Murphy, through a
spokesperson, declined to comment.

Big Action, Few Questions in the Legislature

New Jersey’s Democrat-controlled legislature moved quickly to cut
casinos’ taxes. Credit:Kriston Jae Bethel, special to ProPublica

The legislation gained momentum in early December when Sweeney made
his case to the state Senate’s Budget and Appropriations Committee.

“We are risking four casinos closing,” he told his colleagues.
“And that’s why this bill was proposed.”

The casino industry is the largest employer in Atlantic County, with
more than 19,000 workers, and such a downturn would shutter roughly
half the gaming properties. Some senators worried aloud about losing
jobs; when four casinos closed in 2014, nearly 9,000 employees were
laid off. None of the lawmakers, however, pressed Sweeney for
evidence, and the bill sailed through the statehouse with little
debate.

Indeed, the General Assembly committee spent less than four minutes on
the bill to change PILOT during its Dec. 13 hearing. Nearly half that
time was used by Sue Altman, state director of New Jersey Working
Families Party, a progressive coalition that opposed the bill.

“We are sick and tired of watching big and successful and profitable
industries like casinos pay less than their fair share in taxes,”
she said.

Ocean Casino Resort looms in the distance across town from low-slung
homes. Credit:Kriston Jae Bethel, special to ProPublica

Peter Chen, an analyst with left-leaning think tank New Jersey Policy
Perspective, agreed. “The formula adopted by lawmakers in 2016 takes
into account the possibility of adverse financial conditions,” he
wrote in a letter to lawmakers. “It’s unclear why new changes are
needed to reduce the amount casinos pay, beyond what current law
provides.”

The committee members did not address the criticisms in the hearing,
and just one spoke before voting. “I do have concerns about this
bill,” the vice chair said, without detailing those worries.
Nevertheless, he and eight other committee members approved the bill,
which went before the Democrat-controlled Legislature a week later.

In the end, just four Democrats opposed the legislation, including
state Assembly members Vince Mazzeo and John Armato, both of whom
represented Atlantic City and a large part of Atlantic County.
Armato’s defection was especially notable because he had been the
sponsor of the Assembly version of the PILOT bill. In an unusual move,
he had his name removed from the legislation before the final vote.
“For me to move forward, I needed a lot more information, and I
wasn’t getting it, which made me very uncomfortable,” he told The
Press of Atlantic City and ProPublica.

“When Are We Going to Get Our Fair Share”

Today, New Jersey is reckoning with the fallout from the new law.

Levinson, the Atlantic County executive, made good on his threats to
sue the state, alleging that the new PILOT formula could put several
county programs at risk, including its opioid response, flu and
COVID-19 vaccination initiative, and transportation services for
senior citizens, disabled residents and veterans.

A judge in late February ruled in favor of Atlantic County, finding
that the state violated the terms of its previous settlement agreement
— a ruling that was upheld by the municipal court last month. The
state, however, has not conceded
[[link removed]],
and plans to appeal.

Atlantic City has seen few improvements since the alternative property
tax system began. Its budget remains flat, comparable to past years,
as chronically high poverty and unemployment rates persist.

In March, Small, who supported the PILOT law despite the loss of
revenue, was in Trenton, seeking more gaming money for his city. He
asked lawmakers to back legislation that would send a sports wagering
tax to Atlantic City instead of a state agency. The money would then
be used to provide property tax relief to local residents, who have
seen their tax rates rise over the past decade.

“We redid the PILOT bill, which I supported,” he told lawmakers.
“But people are looking at when are we going to get our fair share
of the pie.”

The Atlantic City Boardwalk as seen through the windows of The
Playground mall. Credit:Kriston Jae Bethel, special to ProPublica

Indeed, the fallout from the legislation is now driving a larger
debate about New Jersey’s gaming taxes, nearly all of which flow
directly to the state, not Atlantic City.

Republican state Assembly member Don Guardian, a former Atlantic City
mayor now in his first term representing Atlantic City and Atlantic
County in the statehouse, said he plans to convene representatives
from the city, county and state, as well as the gaming industry, to
study the casino tax structure. Industry observers consider New Jersey
the country’s most casino-friendly state after Nevada. “Let’s
start taking into account that the world has changed,” Guardian
said. “You need to go back and look at the whole issue.”

Meanwhile, some of the state lawmakers who initially supported the
PILOT change are now questioning why it was necessary. “As more and
more data started coming in on the health and vitality of the
industry, it became clear to me that the idea the casinos were going
to close was more talking point than truth,” said Democratic state
Sen. Troy Singleton, chair of the Senate Community and Urban Affairs
Committee.

During a Senate committee hearing in March, state Sen. Vince
Polistina, a Republican representing Atlantic City and Atlantic County
who voted against the bill in December, was more pointed with his
colleagues. The new law, he said, “was done based on the premise of
a charade.”

Mollie Simon [[link removed]] of
ProPublica contributed research.

_ALISON BURDO is a Local Reporting Network Fellow for ProPublica_

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* Atlantic City
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* Gambling
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* Corporate taxes
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* poverty
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* Inequality
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