A special tax created to help Atlantic City rebuild from the devastating 1944 hurricane is providing a boost nearly 70 years later during another crisis — this time an economic one.
Few people probably realize that whenever they buy a drink, purchase show tickets or book a guest room in Atlantic City, they are charged a “luxury tax.” The proceeds support the Atlantic City Convention Center and Boardwalk Hall, the city’s main sports and concert arena.
Although the tax may be obscure to the public, it has become an increasingly important indicator of the health of the local economy. Luxury-tax revenue fell in 2008 and 2009 but has showed significant gains in the past two years, climbing above $31 million in 2011 for an all-time high.
Analysts say this is another sign that nongambling attractions are helping to boost the city’s fortunes, while gambling revenue continues its 5½-year slump.
“To me, the luxury tax is the biggest barometer of the health of the industry, aside from gaming revenue,” said Jeffrey Vasser, president of the Atlantic City Convention & Visitors Authority, the agency that manages the tax.
With its monopoly on East Coast casino gambling long gone, Atlantic City is trying to reinvent itself as a more diverse tourist town by tempting visitors with an array of upscale restaurants, retail shops, nightclubs and spas. The increasing popularity of those nongambling attractions is reflected in the recent bump in luxury-tax revenue.
“This means the customers who are coming here are doing more than just gambling,” said state Sen. Jim Whelan, D-Atlantic, a former Atlantic City mayor. “They are spending money on other things. We need to keep going in that direction.”
The luxury tax may be unique to Atlantic City. At the very least, it is rare. Vasser said he knew of no other city that charged a special tax that collectively covered hotel rooms, drinks and entertainment.
“It’s uncommon with the different things it touches,” he said. “Typically, you see it on hotel rooms. But rooms, admission tickets and drinks by the glass — typically, you don’t see it on all three.”
Actually, the luxury tax is even broader. The New Jersey Division of Taxation says the tax also is charged for the rental of beach chairs, cabanas and the iconic Boardwalk rolling chairs.
The luxury-tax rate is 3 percent for alcoholic beverages sold by the glass and 9 percent for all other purchases covered by the tax.
In recent years, luxury-tax revenue has fluctuated, reflecting the volatility of the Atlantic City economy. It soared 23 percent, to $26.2 million, in 2005. But it increased only modestly in 2006 and 2007, coming in at $27.3 million and $27.9 million, respectively.
Then it declined to $26.4 million in 2009, just as the national recession was coming to a close. The rebound began in 2010, pushing up revenue by 8 percent to $28.5 million. In 2011, revenue jumped nearly 11 percent, to $31.5 million, to set a record. Figures available for 2012 show that revenue was up in February and March but down in January and April.
Proceeds from the luxury tax are primarily used to pay off the construction bonds on the Atlantic City Convention Center and Boardwalk Hall. Vasser said the revenue also helps to offset the operating deficits on both facilities. The Atlantic City Convention & Visitors Authority also puts some of the tax revenue in reserve or spends it on marketing programs, he noted.
Atlantic City officials also needed money after the 1944 hurricane, which severely damaged the Boardwalk and other parts of town. World War II expenses left no money for disaster relief, so the state Legislature created a special Atlantic City luxury tax to tap the tourist trade for funds to rebuild the resort.
Decades later, the luxury tax continues to provide financial benefits, giving the city a much-needed lift as it struggles with the fragile economy and competition from casinos in surrounding states.
Vasser noted that luxury-tax revenue was almost $19 million in 2002, when he started as president of the convention authority. He pointed to 2003 as a pivotal year in the city’s evolution into a broader tourist destination. That year, the city celebrated the opening of Borgata Hotel Casino & Spa, a Las Vegas-style resort that introduced posh restaurants, nightclubs and spas to ignite the trend for nongambling attractions.
Another growth spurt occurred in 2008, when Borgata, Harrah’s Resort and Trump Taj Mahal Casino Resort each opened new hotel towers. Although revenue from the luxury tax lagged for a while, the city’s post-recession rebound in room rates has helped push revenue higher.
“In the bad times of 2008 and 2009, room rates came down. But as room rates came back up, that had an effect on the luxury tax. As room rates climb, so do the luxury-tax revenues,” Vasser said.
New nongambling attractions were key in 2011, when the city welcomed 16 new restaurants, Vasser said.
“Another good thing has been the growth of restaurants, nightclubs and lounges, as well as concerts,” he said. “The more of those things you get, the more they are reflected directly in the luxury tax. It’s been a good indicator for us that those segments of the tourism economy are growing.”
The opening of Revel, Atlantic City’s new $2.4 billion megaresort, should push luxury-tax receipts even higher because of Revel’s emphasis on nongambling revenue, Whelan said. Revel features a lineup of chic nightclubs, gourmet restaurants and big-name entertainment, including four sold-out concerts by pop superstar Beyonce over Memorial Day weekend.
During its first three months of operation, Revel has gotten off to a slow start with its gambling revenue. It had $13.4 million in April, $13.9 million in May and $14.9 million in June, placing it just eighth among the 12 casino hotels each month. But Revel CEO Kevin DeSanctis said his casino had made progress on the nongambling side of its business as it continues to ramp up operations.
Revel had $8.5 million in nongambling revenue in June, excluding its entertainment operations. That represented a 25 percent increase compared with May. Through early July, Revel’s nongambling revenue was up 30 percent over the same period in June.
“It is clear our economic model is working, allowing us to generate high-margin nongambling revenue and operate at a significantly lower cost versus the traditional, gaming-dependent model,” DeSanctis said.
Outside the casinos, concert festivals at Bader Field may represent another large source of luxury-tax revenue. Ticket sales for rock shows in June by Phish and Metallica were exempted from the luxury tax as an incentive for Bader Field’s fledging concert scene. However, plans to begin charging the luxury tax for concerts in September drew objections from the promoter, Starr Hill Presents.
When Starr didn’t put down a deposit by a June 1 deadline for the September shows, the luxury tax was blamed. Whether Starr will resurrect plans for more Bader Field concerts is unclear. Ken MacDonald, Starr’s director of venue development, declined to comment on the luxury-tax issue.
Whelan defended the luxury tax as a “reasonable cost” for concert promoters. He said there was still plenty of money to be made — by the promoters and the city.
“Everybody will benefit, not only the promoters, but the entire town,” Whelan said. “As for the luxury tax, it has been successful. I would hope that other promoters will look at it and say it will work.”
Contact Donald Wittkowski: