Atlantic County is poised to ask the New Jersey Supreme Court to take on the State’s payments-in-lieu-of-taxes (PILOT) law. The County has asked the Court to review the Superior Court’s decision in August to reverse a change to the law.
The decision to skip the intermediate process is slightly out of the ordinary. However, it’s not unprecedented with litigation that seems destined to end at a state’s highest Court regardless. By skipping the intermediate appellate Court, both parties can conserve their resources. It should mean the case reaches a final decision more promptly than following the typical litigation timelines.
Back in August, New Jersey Superior Court judge Michael Blee ruled that the legislature had violated the State Constitution when it passed amendments to the PILOT program in 2021. The changes had been made to help the Atlantic City casino industry.
What is the PILOT Program?
New Jersey’s PILOT program was initially billed as a way to entice economic development in underused areas. It gave developers a property tax exemption for the length of the agreement with the State.
In exchange for the exemption, developers would contribute an annual PILOT payment. This generally works out to less than the property taxes would have been. These PILOT payments went directly to municipalities. The project’s intention was to boost development and increase employment through construction jobs.
Going Through Changes
The PILOT program became law in 2016. The original purpose of the legislation was to prop up Atlantic City. The program saw casinos benefit by not having to pay property taxes but instead contributing $120 million in PILOT payments during the first year. According to the Press of Atlantic City, those payments would increase as dictated by annual gaming revenue, with payments totaling $132 million in 2018 and $150 million in 2020.
The PILOT payments, however, were controversial for some. The calculations included not only retail casino revenue but also the gross revenue from online casinos and online sports betting. The casinos split the revenues from those latter products with their online partners yet get held liable for the full amount in PILOT calculations.
Prompted by the economic damage done by the pandemic to the Atlantic City casino properties, the New Jersey legislature undertook efforts to revise the PILOT program in mid-2021.
A Long December
In December 2021, legislators passed an amendment to the PILOT program that removed online gaming and mobile sports betting revenues from the calculation for PILOT payments. The effect of the passage was that PILOT payments were capped at $110 million in 2022, estimated to be roughly $55 million less than if the calculations incorporated both online and mobile sports betting revenues.
An Ongoing Battle
Atlantic County has been no stranger in its opposition to the PILOT program. It views the law as inferior to alternative economic development policies.
The County first sued the State over the original 2016 iteration of the legislation but settled in 2018. Under the terms of the settlement, Atlantic County was to receive 13.5% of PILOT payments calculated on gaming revenue, including all verticals. The 2018 settlement was meant to last the entirety of the PILOT program’s ten-year run.
In February 2022, a New Jersey Superior Court judge found that the amendments to the PILOT program violated the terms of the 2018 settlement. However, the initial ruling did not address the constitutionality of the amendment.
The passage of the amendment to the PILOT program prompted not only a challenge from Atlantic County but also from a nonprofit called Liberty and Prosperity 1776, who argued that the legislation violates the New Jersey Constitution by providing preferential tax treatment to a specific group, the casino industry.
For its part, the State argued that the amendments serve a valid public purpose.
Judge Blee ruled against the State. ProPublica reports that Blee noted:
This Court finds that the Amendment was enacted to aid the casino industry and not for a public purpose…
The decision noted that while the pandemic caused hardship, there was no evidence that the casino industry would be unable to meet its payment obligations under the PILOT program. Therefore, there was no clear justification for recalculating the payments.
Will the State Prevail or Strike Out at the Supreme Court?
After striking out twice in a few months, the State is undoubtedly hoping for a better outcome at the Supreme Court. The decision to bypass the appellate Court is not always available. However, in New Jersey, a direct appeal from the Superior Court to the Supreme Court is permissible under certain circumstances. These include cases involving a question of constitutionality, such as this one.
The decision to go straight to the Supreme Court will save both sides considerable legal expenses. At the same time, it will shave between 12 and 18 months off the litigation timeline. There are a lot of formalities that go into an appeal at the intermediate Court, and this plan skips over that.
After hearing the case, the New Jersey Supreme Court will decide on the permissibility of the amendments to the PILOT program. Atlantic County and Liberty and Prosperity 1776 – a nonprofit fighting the law – prevailed at the Superior Court. Even so, they will face a new challenge in convincing four of the seven members of the Supreme Court that the State could not constitutionally amend the PILOT program.
One aspect that may weigh in the County’s favor is New Jersey’s longstanding skepticism of tax treatment favoritism. In the past, the NJ judicial system has paid particular attention to tax policies favoring a single industry.