On July 14th, the IRS held a public hearing for the debt-equity rule (section 385 of the IRS code) that the Treasury Department proposed last April. The hearing, which had as many as 16 speakers from various industries,...
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- The New Jersey Casino That Tax Credits Could Not Save
The New Jersey Casino That Tax Credits Could Not Save
Despite receiving tax incentives, state subsidized worker training, and infrastructure support, the $2.4 billion Revel Casino Hotel in Atlantic City, New Jersey, looks likely to close if it doesn’t find a buyer soon. Last Thursday, the casino filed for bankruptcy for the second time since 2012.
The Revel project had been launched by Morgan Stanley, which halted construction in 2010 after sinking $1 billion into the project. The State of New Jersey revived the project in 2011, when Governor Chris Chrstie (R) arranged for up to $261.4 million in tax credits to complete the project, which in turn leveraged additional private dollars. These credits (which have not been paid, as the casino has yet to cover its operating costs let alone owe taxes) is in addition to $2.6 million provided by the New Jersey Department of Labor and Workforce Development in a Customized Training Grant for worker training, the Casino Reinvestment Development Authority (CRDA) approving $20 million in infrastructure funding in 2009, and Atlantic City approving a $56 million bond ordinance in 2008 (the latter two to improve roads serving the casino). Furthermore, in 2012, the CRDA used its eminent domain power to seize over 60 housing units adjacent to the Revel Casino for supplemental mixed-use development.
New Jersey had projected that the new Casino would bring in $1.6 billion in capital investment, $650 million in additional state and local government revenues, and 5,500 full-time jobs. As it turns out, the EDA estimates were wrong. Since the grand opening in 2012, Revel Casino has never turned a profit. After filing for Chapter 11 bankruptcy in March 2013, it emerged in May 2013 after restructuring to reduce its debt from $1.52 billion to $272 million. But the casino still can’t cover its costs and is again in financial distress. Revel filed for bankruptcy again last Thursday, perhaps for the last time. According to state documents, as of February 2014, the hotel employed only 2,748 employees, of whom only 1,762 were full-time.
Targeted benefits of the type New Jersey has showered on the Revel Casino distort the market signals that investors use to allocate their resources to the highest value use. Sadly, when investors are enticed with special tax breaks, grants, and bonds, valuable resources are often used inefficiently. For example, the private and public investments made in the Revel project could have been used in industries that would have created long-term jobs in New Jersey. The Revel Casino’s lackluster performance should be a cautionary tale for future policy makers attempting to save politically favored industries.
By propping up the Revel Casino with tax policy incentives New Jersey threw good money after bad. New construction and tax incentives are not synonymous with long-term growth. This EDA failure illustrates the downside of business tax credits. Instead of choosing winners and losers, governments should improve their business climate by lowering tax rates for everyone, not by carving up the base.
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