What Is PILOT And Why Is It So Important For Atlantic City?

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There’s some legislative drama unfolding in New Jersey, and if you’re not clear on what it’s all about, you’re not the only one.

The casino industry is a pillar of the Atlantic City economy, employing tens of thousands of workers – almost as many people as actually live in the city. However, as many as four of the city’s nine casinos could be on the verge of closure. So warns Sen. Stephen Sweeney, D-Gloucester.

At the heart of the issue are the unexpected consequences of 2016’s Casino Property Tax Stabilization Act (CPTSA). Sweeney has been fighting to amend the law to correct for those earlier oversights.

However, Sweeney and Assemblyman John Armato, D-Atlantic, who sponsored a similar bill in the other half of the legislature, were both defeated in the November general election. As a result, the fate of those bills, and by extension the Atlantic City casino industry, is up in the air.

It doesn’t help that the problem hinges on an arcane bit of financial arithmetic. Much of the discussion about the proposed modifications has therefore consisted of misleading or disingenuous hand-waving.

Online Poker Report spoke to one of our colleagues at PlayNJ, a local gambling news site in the same network. David Danzis, the lead writer for PlayNJ, has been following CPTSA and the proposed amendments closely. With his help, we’ll try to simplify this complex topic as much as possible for our readers.

What is a PILOT bill?

The CPTSA enacted a version of what’s called PILOT – Payments In Lieu Of Taxes – for the Atlantic City casino owners. To understand what’s going on now, we first need to understand what these programs are, and the purpose they serve.

As the name suggests, a PILOT is a piece of legislation that exempts an entity from standard taxation, in exchange for payments determined by some alternative scheme. More specifically, New Jersey uses them as an alternative to property taxes in certain cases.

The particular calculations vary from case to case. Generally speaking, however, they’ll be both lower and more predictable than conventional taxes. The municipality collects and distributes PILOT money, as it would property taxes. However, under most PILOT schemes it keeps a larger percentage for itself, and distributes less to the county and school districts.

Most of the time, the purpose of a PILOT program is to stimulate urban renewal. Property taxes can provide a disincentive to developers investing in the city. More investments mean higher valuations, which mean higher taxes. Establishing fixed payments removes that hurdle. The municipality itself reaps additional benefits by receiving those payments directly. However, the county and school district usually lose out, which is where resistance usually comes from.

CPTSA, or PILOT for casinos

In 2016, Atlantic City was going through one of its darkest periods. Five of its casinos had shut down in just two years, costing the city thousands of jobs.

There were many contributing factors to this collapse. However, increasing assessments for the physical casino properties themselves weren’t helping. This led to the casino owners successfully appealing those assessments.

Those legal battles were costly for both sides. They also caused budgeting problems for the city, which had to return a significant chunk of the tax money it had already collected and thought it could safely spend. The casinos also faced uncertainty about what their assessments would be like in future years, and whether they’d win subsequent challenges.

It seemed like a better arrangement for all involved to sit down and work out a 10-year agreement for what the casinos would pay and how that would be determined. There’d be no more costly legal battles, and everyone could work out their financial plans with some degree of assurance about what the future would bring.

A three-pronged approach

The deal they reached was extremely – some would say unnecessarily – complex. It involved not one, but three separate types of payments:

  • Traditional PILOT payments with the grand total based on total gross gaming revenue (GGR) for the casinos collectively, and the payments divided up among them by a complicated formula,
  • A lump sum “direct” payment by each casino, and
  • Redirection of Investment Alternative Taxes (IAT), originally established by a 2011 bill, to the municipality; these consist of a 1.5% tax on retail GGR and 2.5% on online GGR, but with some applicable credits

Originally, the bill assigned money to the county in proportion to the PILOT payments. However, the county was unhappy with that arrangement and initiated legal proceedings. As a result of a settlement reached with the state, the county now receives a fixed annual amount.

For their part, school districts are protected by a “hold-harmless” provision in the state’s constitution. This stipulates that their budgets cannot decrease by more than 15% from year to year.

How CPTSA has gone awry

For the first few years, CPTSA accomplished its intended purpose. There were no further casino closures after the Trump Taj Mahal in 2016, and the industry was beginning to look healthier again.

The trouble with stabilizing payments, however, is that if circumstances change, the agreement may no longer make sense.

For one thing, many of the Atlantic City casinos have changed hands over the years. Five of the seven current owners weren’t involved in the original negotiations. Naturally, they feel like they should have some input now. Sports betting also wasn’t legal yet in 2016, and online gambling was much smaller than it is now.

Most importantly, though, no one could have foreseen the COVID-19 pandemic. This has caused retail gaming revenue to plummet, but online activity to increase.

Ordinarily, that would work in the favor of small casinos like Resorts and Golden Nugget who make up for a weaker retail presence with strength in the online channel. However, it also means their share of CPTSA PILOT payments is skyrocketing. Added to this is the fact that the IAT credits expire this year, forcing them to pay a full 2.5% of their online GGR going forward.

Part of the problem is that casinos keep most of their own retail GGR, but online revenue has to be shared with the operators.

Taken together, all these factors mean that the smaller casinos are seeing their CPTSA payments changing in a way that’s out of proportion with their actual pre-tax net earnings.

What the amendments would accomplish

The goal of the proposed amendments isn’t to alleviate the burden of payments on the casino industry collectively. Rather, it’s to reduce the extent to which the distribution of those payments is skewing towards Resorts, Golden Nugget and other smaller properties focused on the NJ online casino market. It would be the dominant retail properties like Borgata and Harrah’s picking up a larger part of the tab instead.

The new bill – S4007 – would accomplish this mostly by eliminating online revenue from the calculation for how PILOT payments get distributed between the casinos. It would also limit the net liability for individual casinos as the IAT credit expires next year and spreads the direct payments over three additional years, until 2026.

PlayNJ obtained estimates for how payments will change from 2021 to 2022 with the amendments in effect. There are two rather important observations to be made:

  • Firstly, total payments will continue to increase even with the changes, from $152.6 million this year, to about $154.6 million next year under the proposed system.
  • Secondly, the small, online-focused casinos will still see their share of payments go up, just by a lesser degree. For instance, even if the new bill passes, Resorts will see its payments leap from $3.5 million to $8 million. Without the changes, its situation would be more dire still.

Even the larger casinos agree change is needed

Given that the changes would shift some of the burden back to the larger casinos, one might expect them to be the bill’s key opponents. That doesn’t seem to be the case, however.

True, the various casino owners are direct competitors. However, the truth is that no one wants a repeat of the period from 2014 to 2016. When casinos are falling like dominos, it depresses the entire market and no one benefits. It also creates a stain on the entire industry, and hurts lobbying efforts elsewhere. Furthermore, the city counts on receiving a certain amount of money from the casinos collectively. If the smaller competitors disappear, the bigger ones will soon find themselves squeezed for more cash to make up for it.

Where does resistance come from?

Rather, the resistance is political, and exists for a few reasons.

Firstly, PILOT programs in general are unpopular with those representing the interests of the country or school district, rather than the municipality. The measures that are in place to protect those interests don’t seem to be enough to mitigate that resistance.

Secondly, the shift in power from the November election has added partisan issues to the problem.

Thirdly, gambling has many opponents on both the right and the more radical part of the left. Many perceive the casino industry to be parasitic or immoral. Those who do, tend to believe that anything good for casinos must be bad for citizens and vice versa.

Many of those concerns might be alleviated by hard numbers. These could show the benefits of the changes and consequences of the current system. Unfortunately, that brings us to the final point: the complexity of the original bill. The projections for 2022 are reassuring, but even those are in dispute.

Beyond that, things get harder to predict. The combination of a rapidly-changing industry landscape and a confusing calculation leads to the perception that there’s some attempted sleight-of-hand going on. Whether or not that’s the case, that suspicion puts the industry and the city in peril. This is, after all, a time when neither could afford another wave of closures.