Could Bethlehem lose casino cash cow?
Matt Assad Of The Morning Call
AUGUST 20, 2016
Pennsylvania lawmakers and casino executives have been squabbling for months about whether things such as online gambling or satellite casinos could help close the state's budget deficit, but another fight winding through the state Supreme Court could have a far bigger impact on Main Streets across the state.
Mount Airy Casino is asking the court to strike down the $10 million host fee most casinos pay to the towns where they are located, arguing it violates the state constitution by putting a much heavier tax burden on lower performing casinos.
If Mount Airy wins its case, it could eliminate a large chunk of the annual fee casino towns across the state use to pay for a wide variety of items.
"Our host fee is equivalent to the salaries of 100 police officers," said Bethlehem Mayor Robert Donchez. "That's a significant amount of money. That host fee is extremely important to our budget."
Sands Casino in Bethlehem is not contesting the fee it pays Bethlehem, but any decision issued by the Supreme Court likely would dictate how every casino must pay — or not pay.
A Mount Airy win would be a devastating blow to the budgets of most casino towns that collect the fee, but there's no need for those municipal leaders to panic, just yet. State legislators suggest they'd move quickly to alter the law to replace the fee — or at least they'd try. State legislators have spent much of the past year debating how to expand gambling to raise more money to balance the budget, but have not been able to reach consensus.
"I don't know exactly how we'd go about it, but given that this fee has been established for a decade, we're not just going to let this money be stripped from municipalities that rely on it," said Sen. Pat Browne, who chairs the powerful Senate Appropriations Committee.
Unequal tax
The case is being defended by attorneys from the state attorney general's office, which argues the tax scheme does not violate state law.
The case started in April 2015, when Mount Airy filed a legal challenge that argues the "local share tax" violates the uniformity clause in the state constitution, which requires that "all taxes shall be uniform, upon the same class of subjects." As a constitutional challenge to the gaming law, the matter was eligible to bypass lower courts and be filed directly to state Supreme Court.
The 2004 state gaming law imposes a 2 percent fee on gross slot machine revenues, to be paid to the municipalities where the casinos were built. However, the law also states that a minimum of $10 million must be paid. Therefore, the 2 percent would only really come into play once gross slot machine revenues for a casino went above $500 million.
Because that's never happened, the nine casinos affected by the law — SugarHouse Casino in Philadelphia and two resort casinos aren't subject to the minimum requirement — simply pay $10 million a year.
That creates an unequal tax that has some casinos paying a much bigger portion of their revenues to their host community. So, while the $10 million paid by Pennsylvania's most lucrative casino, Parx in Bensalem, was just 2.8 percent of the casino's 2014 gross slot machine revenue, the $10 million Mount Airy paid was more than 7 percent of its $140 million in revenue for 2014.
Each day, the Department of Revenue siphons 2 percent of all slot machine revenues from each casino and distributes it quarterly to the host community. At the end of the year, if that casino hasn't generated $10 million in fees then state regulators instruct the casino to make the payment needed to reach the $10 million minimum.
That "true-up" payment is what Mount Airy is contesting. For Mount Airy, the payment was $7.2 million for 2015, but even successful casinos have to write big checks. Sands, for example, had to pay $4 million to reach its minimum for last year.
In Sands' case, $3.2 million of that true-up payment went into Bethlehem's general fund and about $800,000 went to Allentown, under a deal struck between the cities before the gaming license was given to Bethlehem. It's a similar story in casino towns across the state, where casinos — depending on their revenue — pay end-of-year true-up fees ranging from Parx's $2.4 million to the $7.7 million paid by Presque Isle Casino, Erie.
"All we're asking for is uniformity and fairness, and that $10 million rate is neither," said Michael Sklar, the Atlantic City attorney who is co-counsel for the Mount Airy suit. "We think if the court strikes down the $10 million minimum, the 2 percent tax passes constitutional muster."
In addition to asking that $10 million minimum be struck down, Mount Airy is asking the court to award damages. While it doesn't specify how much, it has paid $57.4 million in true-up fees since it opened in 2007, second only to Presque Isle's $61.8 million.
Not a surprise
Part of Mount Airy's argument is not only that lesser performing casinos are unfairly burdened, but also that not every casino must pay the $10 million minimum. SugarHouse Casino in Philadelphia pays a straight 4 percent of its gross revenue. That consists of the same 2 percent all state casinos pay to their host county, plus another 2 percent that represents the local share, but without the $10 million minimum Mount Airy and other casinos pay.
Christopher Craig, a Pennsylvania Treasury attorney and former legislative counsel who wrote much of the gaming law, wouldn't predict how the court will rule, but he explained why the law was written the way it was.
The proposed Philadelphia County casinos in the law weren't given a $10 million minimum because the city was expected to be the only municipality that would have two casinos, therefore there was no need for a minimum. As it turned out, SugarHouse has been the only casino built so far, while the other gambling license has been delayed for years.
More to the point, Craig said the host fee is just that — a fee that every casino applicant was aware of when they applied for a gambling license in 2004. Though the Mount Airy suit repeatedly refers to it as a "Local Share Tax," it was actually called a "Local Share Assessment" in the law, Craig noted.
"A cost was identified for the impact gambling would have on a municipality and that cost was $10 million," Craig said. "In exchange for engaging in an activity that would otherwise be illegal, the licensee agreed to pay a minimum of $10 million."
That's how Sands Casino CEO Mark Juliano interprets it.
"We knew exactly what we were getting into when we applied for the license," Juliano said. "We're not trying to get out of it. We don't intend to join in the suit."
But two other casinos also have raised similar challenges. Harrah's Casino in Chester filed a similar suit last year and Rivers Casino in Pittsburgh filed a nearly identical suit in July. Harrah's suit was stayed while the Mount Airy case runs its course, and Rivers withdrew its case just a few weeks after filing it, presumably to wait for the Mount Airy decision.
Both sides have spent months filing preliminary objections and briefs, and oral arguments have already been made. There's no time limit on how long the court has to deliberate on the matter, so a decision could come any day, or it could be months away.
Analysts say the court could do everything from deny the challenge, to strike down the $10 million minimum requirement — or even strike down the entire local share fee altogether. It also will have to decide whether Mount Airy and the other casinos deserve a refund of any of the the more than $320 million in true-up payments they've made the past decade.
"This is one everyone is watching closely," Browne said. "There's a lot at stake."
AT ISSUE
• Mount Airy Casino is asking the Supreme Court to strike down the $10 million host fee most casinos pay to the towns where they are located.
• All casinos pay 2 percent of all slot machine revenues to the state Department of Revenue to be distributed to host communities. However, if that amount is less than $10 million annually, casinos are required to kick in the difference.
• That difference, a "true-up" payment, is what Mount Airy is contesting. In 2015, Mount Airy's true-up payment was $7.2 million.
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