It hasn’t been a good year in court for New Jersey Governor Steve Murphy or Atlantic City casinos.
Last year, the State passed a law making changes to the calculations used for the casinos’ PILOT, or Payment in Lieu of Taxes. The casinos had requested the changes. They argued that unforeseen economic circumstances had made the original calculation unfairly burdensome to certain properties.
However, the changes also negatively affected the amount of money going to Atlantic City and the surrounding county. Legal battles ensued, and courts have now ruled against Gov. Murphy and his legislature twice.
Back in late February, Superior Court Judge Joseph Marczyk agreed with Atlantic County that the change to the law violated a 2018 agreement it had in place with the State. That ruling didn’t prevent the State from continuing to apply the new law, but it did award damages to the county.
Now there has been a second, more severe ruling against the State. Superior Court Judge Michael Blee has found the law unconstitutional on the basis that it amounts to preferential tax treatment for the casino industry.
The State will appeal both decisions. If they are upheld, however, the State will be on the hook for millions in damages, and PILOT calculations will revert to what they were previously. In the meantime, it’s unclear how state tax collectors should calculate the payments.
What is the Purpose of a PILOT Law?
Opponents of the changes frame them as a tax break for the casino industry. That’s arguably the case, but PILOT programs aren’t specific to casinos and have a different rationale than simply stimulating a particular business.
Atlantic City has been struggling economically for decades. It’s a complex issue, but one facet is urban decay.
One factor that contributes to urban decay – or rather, disincentivizes urban renewal – is the fact that property taxes are tied to property valuations.
Investing in upgrades to a property doesn’t only incur the direct cost of paying for those upgrades. It also means an increased tax burden. Property owners can therefore hesitate to make those improvements. If they don’t result in increased revenue, they could not only fail to produce a return on the investment but actually lose additional money in the long term.
What’s more, businesses faced with soaring property taxes may elect to challenge those valuations. Performing re-assessments and defending the results can be costly for the city.
PILOT programs provide an alternative. Participating businesses get an exemption from property taxes and make payments according to some other calculation. This is usually based on revenue. Thus, the government gets to avoid spending on bureaucratic and legal battles. Property owners can invest in their properties without worrying about shooting themselves in the foot. The public then has fewer crumbling old eyesores to look at.
In principle, at least, it’s a win for all involved. In practice, a lot depends on the nature of those calculations.
Why Did Atlantic City Casinos Want the PILOT Calculations Changed?
A lot has changed for the gambling industry in the last few years. US online gambling has been on a tear since 2019, largely thanks to the legalization of sports betting. The disruption of retail gambling in 2020 due to the COVID-19 pandemic hurt overall gaming revenue yet sent even more players to online casino apps.
New Jersey was among the first states to offer online gambling in 2013. The original PILOT law for Atlantic City casinos only dates back to 2016. So, the casinos can’t claim that online gambling wasn’t a consideration in negotiating the calculations. However, retail casino revenue has been much lower since 2020 than would have been initially expected. Meanwhile, online casino revenue has been much higher.
According to proponents of the changes, that unfairly shifted the burden to small casinos with an outsized online presence. That includes, most notably, Resorts and Golden Nugget. Another factor is that many casinos have changed hands recently, and five of the current seven owners weren’t party to the original negotiations.
At the time, it was argued that the changes wouldn’t affect the total amount paid, only its distribution. However, this year’s total payments did drop by $55 million. A conservative nonprofit called Liberty and Prosperity 1776 brought the challenge, resulting in Judge Blee striking the new law down.