Ocean City Tourism Officials, Council To Consider Room Tax Increase

Ocean City Tourism Officials, Council To Consider Room Tax Increase
Photo by Chris Parypa

OCEAN CITY – A major takeaway from this week’s review of the town’s annual revenue and fiscal policy review is a proposal to increase the room tax rate by half a percentage point.

During Tuesday’s work session, City Manager Doug Miller and Budget Manager Jennie Knapp presented a rosy review of the town’s debt-to-revenue picture for the fiscal year that ended on June 30 and perhaps the most important element to come out of that discussion was a proposal to increase the town’s room tax rate from the current 4.5 percent to 5 percent. In 2007, Ocean City officials raised the town’s room tax rate from 4 percent to 4.5 percent and dedicated 2 percent of the gross revenue to advertising and marketing the town.

While the increase has resulted in greater revenue obviously and a larger advertising and marketing budget, the question remains whether it’s enough. In the first fiscal year after the room tax rate was last raised, the town collected over $11 million, of which 2 percent was dedicated to advertising and marketing. By fiscal year 2018, that figure had jumped to $15.5 million, representing a 41-percent increase over the nine-year period.

However, the percentages of the total room tax dedicated to advertising and marketing and the contribution to the town’s general fund, which supports essential core services, has changed over the years. For example, in fiscal year 2009, over $3 million, or about 28 percent, went toward the advertising budget, while nearly $9 million, or 72 percent, went to the general fund. In fiscal year 2018, however, $6.8 million, or 44 percent, of the total room tax collected went to advertising, while $8.7 million, or 56 percent, went to the general fund.

The changing dynamics have resort officials considering another hike in the room tax rate from the current 4.5 percent to 5 percent. State law allows for a room tax rate of 5 percent and increasing Ocean City’s from 4.5 percent would merely require approval from the Worcester County Commissioners.

Even a modest room tax increase could nudge the cost of renting accommodations in Ocean City slightly higher in a resort often dealing with a value perception. However, the modest hike could offset the cost of rising operational and maintenance expenses and even increase the amount of money dedicated to marketing and advertising. It is proposal the Mayor and Council are considering, and Councilman John Gehrig said on Tuesday the discussion should likely begin at the tourism commission level.

“I think it makes sense to offer this to the tourism commission for a workshop,” he said. “It can start there and the committee can send recommendations to the full Mayor and Council.”

Council Secretary and Tourism Commission Chair Mary Knight said she would review room tax rates in other neighboring coastal communities in advance of any discussion about increasing the room tax here. She said her most recent review revealed there was room for improvement.

“The last time I did it, we were substantially lower than other jurisdictions around the region,” she said. “For example, Rehoboth and the Delaware beaches are already considerably higher.”

While he supported the concept of hiking the room tax rate, Mayor Rick Meehan cautioned about preserving the ratio of the revenue dedicated to the town’s general fund. He said the last room tax increase was undertaken at a time of financial uncertainty and the subsequent revenue dedicated to marketing allowed Ocean City to thrive while some resort destinations struggled.

“One thing that’s important is to look at what goes back into the general fund,” he said. “When we did this the last time, it worked. It did just what it was supposed to do. It was the right thing to do at the right time.”

Now, in more robust financial times, Meehan said it was important to carefully examine the impact of any room tax increase on the general fund and, ostensibly, the bottom line on the property tax rate. Meehan said he supported starting the discussion at the tourism commission level, but said it was ultimately the Mayor and Council’s purview on such weighty decisions.

“We need to make sure the return to the general fund benefits the taxpayers,” he said. “Some of that falls on the Mayor and Council. I’m in favor of getting recommendations from the tourism commission, but I think there needs to be a balance between recommendations from the committee but also decisions by the Mayor and Council.”

While the last room tax rate increase in 2009 clearly bolstered the town’s advertising budget by design, has it been enough to accomplish the overall goal. Clearly, the days of a Memorial Day to Labor Day season are long gone, but Knapp suggested there could be room for more growth during the rest of the year.

“We’ve done a great job of extending the season from May 1 to Oct. 1,” she said. “From October to April, we’re not really seeing the growth, but the expenses are now greater during those times.”

Knapp was referring to the cost of providing essential core services throughout the year, such as public safety, police and fire protection along with the strain on the town’s infrastructure in a year-round resort versus the revenue driven by the room tax, regardless of the rate.

Councilman Mark Paddack agreed with the comment about the off-season months becoming more of a challenge.

“It appears to me our offseason marketing has not been as effective as it could be,” he said. “The money we’re bringing in doesn’t appear to offset the increase in expenses in some of those areas.”

That’s what makes those ratios in room tax revenue dedicated to marketing and room tax dedicated to the general fund, which supports those essential services, so important. Whatever route is chosen with the room tax rate, maintaining that balance is paramount, according to Gehrig.

“When tourism increases, there is a cost of doing business,” he said. “That’s why the general fund allocation is at 56 percent. Economic development is different than advertising. We’re always going to be about sunshine and the beach and the ocean and that hasn’t changed, but we have to continue to look at economic development. We have invested in golf and we’ve invested in special events and that has helped. We have to continue to invest in tourism. That’s our primary business.”

Council President Lloyd Martin agreed a balance needed to be maintained and pointed out the large percentage of the general fund already dedicated to providing core services such as public safety and public works, for example.

“We collect $43 million in property tax, and we spend $33 million per year on public safety,” he said. “Those are the core services we’re talking about. We have to pay for the core services we want and need in this town.”

Meehan reiterated the importance of maintaining that balance, regardless of the final decision on a proposed room tax hike.

“The core services are important and there is a cost associated with providing those,” he said. “That’s why we have to have the revenue to support that.”

In the larger picture, the town’s revenue and fiscal policy review presented on Tuesday showed a rather rosy financial position for the town. Ocean City’s stated policy of using long-term borrowing in the form of bonds, loans and leases for capital projects only has been closely adhered to and the numbers bare that out. The town has also been successful with its “pay as you go” policy for certain long-term capital projects.

For example, by code the town’s total bonds and other indebtedness are not to exceed 5.2 percent of the total assessable base. With a current assessable base of nearly $9 million, that 5.2 percent would come out to around $464 million. However, the town’s current level of bonds, leases and other indebtedness comes in around $116 million, or just 1.3 percent.

In addition, Ocean City currently enjoys -solid bond ratings from the major rating agencies, which allows the town to get great interest rates on bonds for capital improvement projects, a point not lost on Miller.

‘Our bond ratings are extremely healthy,” he said. “For a town that relies on tourism to have a AA-plus bond rating reflects on our governance and financial stewardship.”

About The Author: Shawn Soper

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Shawn Soper has been with The Dispatch since 2000. He began as a staff writer covering various local government beats and general stories. His current positions include managing editor and sports editor. Growing up in Baltimore before moving to Ocean City full time three decades ago, Soper graduated from Loch Raven High School in 1981 and from Towson University in 1985 with degrees in mass communications with a journalism concentration and history.