The peak year for the Atlantic City casino industry in the new century was 2006, the year gaming revenue crossed the $5 billion mark. $5.2 billion to be exact. The following catastrophes occurred:
- Casinos opened in Pennsylvania
- The Great Recession opened everywhere
- Superstorm Sandy
- Tumbling gaming revenues
- Successful tax appeals
- PILOT
Approved in 2016 by the state legislature, PILOT—an acronym for payment in lieu of taxes—put a stop to costly tax appeals which resulted in large refunds from the city of Atlantic City to the casinos. Under PILOT, the gaming halls paid an amount established by a formula involving gaming revenues, hotel room count and acreage. Moreover, the city would know how much tax revenue to expect and budget accordingly. Part of the PILOT revenue went to Atlantic County, and part went to the schools.
But, this being Atlantic City, something was bound to go off the rails, and off the rails it went. The coronavirus pandemic slammed casino revenues for over two years. And this year, a casino tax break expired. The gaming industry, with help from State Senate President Steve Sweeney, pushed for an amendment to cut sports betting and online gaming from the calculations. Their reasoning: most of the revenue went to third-party operators, not to casinos, so why should the revenue be counted as part of our taxes?
Fair or foul? The Press of Atlantic City and ProPublica examined the situation in detail to try and answer that question.
For Atlantic City, property valuation went from $13.7 billion in 2008 with 11 casinos to $3.2 billion in 2016 with only seven properties. Debt skyrocketed to $456 million. The successful tax appeals made a bad situation worse.
PILOT made the bad situation a little better.
Starting in 2020, the city and the casino industry faced another crisis in the form of the Covid-19 pandemic. The casinos shuttered for several months and when they reopened, they did so with a boatload of restrictions. In-person visitation dropped. Most restaurants resorted to take out. But mobile sports betting and online gaming exploded, at least keeping the industry afloat.
Yet, revenue fell compared to pre-pandemic days in 2019, even with the online spending. In 2021, the casinos’ revenues began to improve, but they still pursued options to reduce their tax liability. “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 Casino Association of New Jersey said in a statement.
As casinos pushed for tax relief, the industry recorded profits above 2019 pre-pandemic levels. The industry reported around $767 million in gross operating profit in 2021, the best figure in a decade.
Under the PILOT figures, Atlantic City would have received $133 million this year, $41 million more than the city is actually getting under the amended law, according to state and city projections. Lawmakers passed the amendments with little in the way of hearings or debate.
The city of Atlantic City accepted the change, even though they would lose all that revenue in the process. Atlantic County was not so magnanimous. They sued over its proposed loss of revenue. The court said the casino payment had to align with a 2018 agreement with Atlantic County.
“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 timing of the casino request coincided with the expiration of a separate tax break for the industry, that being the investment alternative tax, created in 1984 to finance community projects. But the industry got a break on those taxes, at least for five years, which ended this year.
You can see where this is going and how it all ties together—the Taj Mahal and Revel, both closed, changed ownership and reopened in early summer 2018 as Hard Rock and Ocean, respectively. Online gaming and sports betting mushroomed. Revenue climbed; so did PILOT payments.
Determine the industry’s overall PILOT payment by calculating the prior calendar year’s total gross gaming revenue, which, in 2021, was $4.2 billion. Based on the system established in 2016, the overall PILOT payment would be $165 million, a $35 million hike compared to 2021. Two of the city’s nine casinos would have actually seen a decrease in their PILOT. But under the amended law, every casino pays less, except for Caesars which would pay $15.6 million as opposed to $13.4 million under the 2016 bill.
None of this sat well with the county.
“It is confounding that the casinos can claim they are suffering while all reports indicate they are setting revenue records,” County Executive Dennis Levinson wrote.
But Steve Sweeney issued dire warnings. “We are risking four casinos closing,” he told his colleagues. “And that’s why this bill was proposed.”
“The numbers don’t indicate any casino would close,” said Roger Gros, publisher of Global Gaming Business Magazine, an industry trade publication.
The loss of funds for the county would affect programs such as opioid response, flu and Covid-19 vaccination initiative, and transportation services for senior citizens, disabled residents, and veterans.
Hence, the lawsuit.
A judge ruled in favor of Atlantic County back in February because the state violated a 2018 settlement agreement—a ruling that was upheld by the municipal court last month. The state plans to appeal.
“The industry as a whole is going to use that negotiating leverage, as they always do,” said Robert Sturges, a former leader of the state agency responsible for regulating casinos, the Division of Gaming Enforcement, who now consults for the casino industry. “Does it actually come to that? I’m sure it won’t.”
The industry believes their percentage of online revenues falls between 20 and 25 percent. So why not tax the online portion accordingly?
Golden Nugget Atlantic City appears to have inked a deal to share the PILOT burden, however. The company specified that its internet gaming partner is responsible for the portion of the PILOT dues generated under its online license, according to that firm’s SEC filings.
MGM Resorts International, which owns Borgata Hotel Casino & Spa in Atlantic City, led the way in 2018, when it entered a 50-50 joint venture with Britain-based Entain PLC to form BetMGM, an online wagering sportsbook.
By 2021, Caesars Entertainment Inc.—the parent company of Caesars Atlantic City, Harrah’s Resort Atlantic City and Tropicana Atlantic City—had gone further, clearing several hurdles to acquire one of its online betting partners, Britain-based William Hill PLC, which collects about one-fifth of all the money bet on sports in the U.S., according to the company’s reports.
Bally’s Corp. was making similar moves, scooping up a number of betting sites to support its expansion into the online gambling space. When Bally’s released its preliminary first-quarter results in April 2021, it also disclosed its plan to acquire U.K. online gaming operator Gamesys Group PLC for $2.7 billion. The purchase closed in October, one in a series of buys to bring internet gaming operations entirely in-house.
