New Jersey lawmakers not envious of Pennsylvania’s gambling tax windfall

That might sound like a lot, but neighboring Pennsylvania collected $1.1 billion in taxes — well more than triple New Jersey’s take — on a slightly lower $2.65 billion from the same revenue sources for the Keystone State’s casinos (plus a small amount from truck stop video gaming terminals and fantasy sports).

The difference, of course, is that New Jersey has some of the lowest gaming tax rates in the U.S., while Pennsylvania has some of the highest.

So is there any groundswell among state lawmakers in New Jersey to try to “catch up,” especially after a year-long pandemic has led to declines in some other sources of tax revenue?

Not at all — not even a little. And the reason lies with the gambling history of both states.

New Jersey, the next Nevada
Back in 1978, Resorts in Atlantic City became the first legal casino outside of the state of Nevada. The big question back then: How to know how much to tax casinos in New Jersey? Legislators’ answer was simply to follow Nevada’s low-tax lead.

And that, says Assemblyman Ralph Caputo, is where an initial mistake was made by his state, though he wouldn’t change it now. Caputo should know; he was a state assemblyman from 1968 to 1972, left politics to become an Atlantic City casino executive for decades, then returned to the General Assembly in 2008.

“The tax rate should have been higher in the first place,” Caputo, the chairman of the Tourism, Gaming and the Arts Committee, recently told njonlinegambling.com. “I agree that we should have taken advantage then, but it wasn’t politically possible. Nobody wanted to upset the apple cart.”
Instead, New Jersey opted for a tax rate of 8% of casino taxable gross revenue (plus a 1.25% additional tax in some instances).

Pennsylvania had its own ideas
But across the Delaware River, Pennsylvania was a later adopter of most forms of gambling. A 2004 law finally passed to bring casinos to the state — first just with slot machines in 2006 and then with table games added in 2010.

So unlike New Jersey’s experience, Pennsylvania joined up with a well-established industry that was successful across the country. As such, the state set a 54% tax rate on slot machine revenue that was widely jeered in the gaming industry as being too onerous.

But casino operators elected to enter one of the larger U.S. states anyway. In a recent interview with Pennbets.com‘s Gary Rotstein, retiring Pennsylvania Gaming Control Board licensing director Susan Hensel said the rate proved to be a boon for state taxpayers.

“You can look at the success of Pennsylvania and say that the model worked,” Hensel said. “Different jurisdictions make different policy choices about what they want. The primary goals in Pennsylvania were to assist the horse racing industry, to create jobs, and to raise tax revenue, and you can look back on Pennsylvania’s history and say they were successful in all those and continue to be.”

In 2017, Pennsylvania legalized online casino games — this time four years behind New Jersey — as well as sports betting if and when the federal government (specifically, as it turned out in 2018, the U.S. Supreme Court) elected to allow it.

New Jersey set online casino taxes at 15%, while Pennsylvania went with the same rates as its land-based casino taxes: 54% for slots and 16% for table games.

For brick-and-mortar sports betting at New Jersey’s casinos and racetracks — which account for only about one-tenth of sports wagering — the tax is just 8.5%. As for mobile sports betting, where most of the “action” is, the rate is 13%. Pennsylvania’s combined state/local sports wagering tax is 36% for both formats.

Your turn, New Jersey?
Retired New Jersey Sen. Ray Lesniak, who a decade ago spearheaded the push to overturn the 1992 federal law limiting most legal sports betting to Nevada, said he is content with the size of the sports betting tax rate.

“I didn’t push for sports betting all those years just for tax revenue on that,” Lesniak said. “The primary goal was to save the casinos and the racetracks from bankruptcy — and it worked. It’s a booming business. We’re maintaining open space [through preservation of horse farms] and we’re keeping a lot of jobs.”

Lesniak, an attorney and still a special counsel to the Senate Democratic majority, said he is aware of no consideration of boosting any gambling taxes in the state.

Caputo added that since those first Pennsylvania casinos opened in 2006, the Atlantic City casino industry has been under great stress. In fact, five out of 12 casinos there closed between 2014 and 2016, with Hard Rock and Ocean Casino opening two years later to set the current figure at nine casinos.

“The timing of raising taxes would be off,” Caputo said. “Now is not the time.”

State Sen. Paul Sarlo, whose district includes the Meadowlands Sports Complex, agreed.
“It doesn’t work to overtax casinos,” Sarlo, the chairman of the powerful Senate Budget Committee, told njonlinegambling.com.

To the idea of raising gambling taxes, gaming industry lobbyist William Pascrell III flatly replied, “That’s not going to happen. New Jersey won’t mess with success.”

History lesson
Many veteran lawmakers no doubt recall the last governor to even broach the subject of raising gambling taxes in the state: Jim McGreevey, almost two decades ago.

When McGreevey floated the idea in 2002, industry lobbyists pounced immediately. At the time, the billion-dollar Borgata casino, described as Atlantic City’s first “Las Vegas-quality casino,” was under construction and another similarly sized project was in the pipeline.

A number of other casinos in the city were planning upgrades at a cost in some cases of more than $100 million to compete with the future Borgata. Casino executives warned that if the tax rate was raised once, there was no reason to think that lawmakers might not do the same again, and again.

McGreevey backed down, and in the next few years it
seemed like a wise move. Borgata opened its doors to great success, and the industry continued its perfect record of growing annual revenue every year through the 2006 peak of $5.2 billion. Tax revenue, of course, followed suit, and the casino opening and upgrades elsewhere led to more and more jobs — and thus other forms of tax revenue.

A newcomer to the scene is forgiven for wondering if the status quo on New Jersey gambling tax rates, in this era, should be increased. For a variety of reasons, however, there’s no reason to expect that longshot to pay out at the window.