Ocean City Continues Room Tax Increase Talks; Council Seems Supportive Of Hike, But How To Spend New Revenue Remains Unclear

Ocean City Continues Room Tax Increase Talks; Council Seems Supportive Of Hike, But How To Spend New Revenue Remains Unclear
File photo by Chris Parypa

OCEAN CITY — After hours of often-tense debate, resort officials this week chose not to increase the room tax rate in Ocean City in favor of having their counterparts in the county begin to explore the potential change.

During Tuesday’s work session, the debate over potentially increasing the room tax in Ocean City from the current 4.5 percent to an even 5 percent began anew, and after hours of dialogue, no firm decision was reached on the increase. Instead, resort officials voted to have Mayor Rick Meehan write a letter to the Worcester County Commissioners, who would ultimately have to approve the request room tax hike, to gauge their viewpoints on the increase.

The room tax was last raised from 4 percent to 4.5 percent in 2007 and 2 percent of the overall increase was dedicated by ordinance to advertising the marketing the resort. While it appears the majority of the council agrees it is time to revisit the room tax rate after the last increase 12 years ago achieved the desired results, there was no clear consensus on how best to spend the additional revenue the augmentation would create.

Several options were presented on Tuesday, but the bottom line in what is certainly a complicated formula is continuing to dedicate a portion to advertising and marketing while also making a significant contribution to the town’s general fund. The latter would be used to offset the cost of providing services during the growing shoulder seasons and special events.

In what is essentially a chicken and egg debate, dedicating room tax revenue from the last increase to advertising and marketing has been successful in expanding the shoulder seasons with special events throughout the year, according to tourism representatives. As a result, the cost of providing services such as police, fire, public safety and public works, for example, has gone up in kind, creating a strain on the general fund budget.

Room Tax Rate Increase

Increasing the room tax rate as proposed effective July 1 would raise an additional $1.3 million in general fund revenue. If the effective date is moved to next Jan. 1, that figure would drop to under $500,0000 because the peak summer season would not be included in the first year.

Again, a portion of the room tax revenue would be dedicated to the town’s advertising and marketing budget, including a potential dedication of some of the funds to exploring and tapping the growing youth sports market. In the short term, however, the proposed increase would support the general fund and help offset the increased cost of providing services and infrastructure to visitors. Budget Manager Jennie Knapp explained despite the last increase in the room tax rate 12 years ago, the contribution of room tax to the general fund has remained stagnant or even declined.

“For 10 years, we’ve seen the amount of general fund contribution for room tax steadily go down,” she said. “Now, we’re just getting back to the level we were 10 years ago.”

Knapp explained the growing number of special events and an expanded off-season has increased the demand on services, creating a strain on the general fund budget.

“We spend $300,000 a year on police overtime for special events,” she said. “That illustrates just how special events effect the general fund. The same goes for public works. Those are indirect costs that aren’t reflected in the special events worksheets.”

Knapp said the alternatives to not increasing the room tax at this time may not be palatable for many.

“Those are all increased costs over the years,” she said. “If you don’t want to raise property taxes and you don’t want parking meters all over town, you have to find a different funding mechanism for some of these things.”

Council President Lloyd Martin supports raising the room tax rate in principle to help offset the increased cost of providing services to residents and visitors.

“I agree with raising the room tax to pay for the extra costs were incurring because of the growth,” he said. “We’ve added 10 police officers because of growth and we’re considering adding more. We’re hearing from people they are grateful for the stronger police presence and they feel safer.”

Councilman Dennis Dare said there were essentially two elements of the issue, one of which was deciding to raise the room tax rate from 4.5 percent to 5 percent. The other issue, while intrinsically connected to the first, was coming up with a strategy to tap the growing youth sports market. Dare said the council was literally and figuratively trying to digest both during the same discussion.

“The way to eat an elephant is one bite at a time,” he said. “I feel like I’m choking down the whole elephant right now.”

Dare then presented some statistics for room rates in other tourist destinations to illustrate how there was room for growth in Ocean City’s rate. For example, he said Virginia Beach is at 13 percent, while Myrtle Beach is at 15 percent. Atlantic City is at 14 percent and Washington, D.C. is also at 14 percent.

“I like the idea of sports marketing and we should wade into that,” he said. “We should have started that already, but I don’t think we should derail the room tax increase issue because of that.”

Procedural Questions

While the majority of the council agrees with the concept of raising the room tax a half a percentage point, Tuesday’s marathon spurred some procedural questions about how best to affect the change. Councilman John Gehrig, who has been a fierce proponent of going after the youth sports market, questioned if Tuesday’s work session was the right time and place to vote on the increase and pointed to the tabling of another issue earlier in the meeting to illustrate his point.

“I just want to make sure I understand the proposal,” he said. “We just delayed nine cell towers so we can get more information about how they will look and where they will go exactly. Now, we’re trying to rush this major decision through without weighing all of the information or hearing from our constituents.”

However, Councilman Tony DeLuca, who had made a motion to approve the change earlier, called Gehrig out for his alleged surprise over the call for a vote.

“You and I have talked about this,” he said. “We’ve all talked about this. Today, you’re talking like all of this is a surprise. Shame on you for that. We’ve been talking about this for months and months. This is not a surprise today.”

Councilman Matt James said it might be disingenuous to vote on raising the room tax rate on Tuesday without first defining how the potential windfall would be spent. James questioned the motivation for raising the room tax merely to pay bills for increased service.

“If we’re going to raise the room tax, I don’t think we should do it today,” he said. “I think if we’re going to do it, there should be a wow factor. I just don’t want to do it to pay bills with it.”

Council Secretary Mary Knight said she supported the idea of pursuing the youth sports market, but urged her colleagues to move forward with first approving the tax hike as a necessary first step.

“I’d like to see a positive vote on this today, so we can move forward,” she said. “I also think we need to vigorously pursue this now and not keep kicking this down the road.”

Gehrig again questioned if the work session was the right time and place for a vote on the room tax hike.

“I thought we had a policy not to vote on major decisions during work sessions,” he said. “How are we at the point where this is the first time we’re discussing this publicly and we’re ready to vote on this? What would be the harm in putting the brakes on this and making good decisions based on the numbers? I think we’re all in agreement. I just don’t know why we need to do this today. I’m sure we can work through this and come up with a solution everybody loves.”

Dare said there had to be a starting point and voting to approve the room tax hike as proposed could provide that.

“The thing to remember is what we have to do to affect this change,” he said. “Everybody is acting like if we vote on this, that’s it and it happens tomorrow. We need to have the county approval and we then we need an ordinance change that has to be advertised and all that entails. In between, we can have another work session. We have time to work all of this out.”

City Solicitor Guy Ayres proved to be the voice of reason in the tense debate, pointing out Worcester County will ultimately have to approve any proposed room tax hike.

“I could have probably saved us all the last hour or so,” he said. “You have to remember this is a county tax. You don’t have the authority to simply raise this on Monday night. One of the first steps in this is getting the County Commissioners to approve the change.”

James reiterated it wasn’t fair to ask the county to raise the room tax rate without a clear plan on how best to spend the new revenue.

“How can we ask the county to raise the tax when we haven’t identified what we’re going to spend it on?” he said. “How can we ask them to do something when we don’t even know what we’re doing yet? I just think it’s irresponsible to ask them to increase this tax without identifying what we want to spend it on.”

Sports Marketing Debate

While clearly much of the revenue derived from increasing the room tax rate would continue to be dedicated to general resort advertising and marketing, along with a considerable contribution to the general fund, Gehrig continued to push for a portion to be utilized to tap into the youth sports marketing. It was a narrative he began at the Tourism Commission level in January. He said Ocean City’s target market has always been families and did not suggest that should change, but emphasized the billion-dollar youth sports market could provide an opportunity for new growth in the resort.

“The last time we invested, it clearly worked,” he said. “There are different challenges now. People are traveling differently now and we need to attack those differences. The youth sports movement is hurting us. There are 150 million kids playing youth sports and that’s what is driving family vacations now. Parents are traveling up to 30 weekends a year for youth sports tournaments and camps.”

Gehrig said Ocean City’s target audience has changed somewhat over the years and tapping the youth sports market represents an opportunity to keep up with the times.

“Let’s face what we are,” he said. “We’re a last-minute, weather-based destination. It’s not the 1970s anymore. We talk constantly about a supply and demand problem and how we have more supply than demand. People are making their vacation decisions based on youth sports tournaments. We’re built to dominate that market, but we’re late to the game.”

Gehrig said significant private sector investments in youth sports have been made in areas that have embraced the concept. To be sure, Ocean City has done a great job with embracing the market with indoor and outdoor tournaments filling up Northside Park and other venues almost every weekend, but Gehrig suggested there is more to be done and the town is lagging behind other areas.

“Cal Ripken is a Maryland guy and he built nine baseball fields in Myrtle Beach because Myrtle Beach is out in front of this and built nine baseball fields on their own,” he said. “That’s almost embarrassing. We need to take some leadership on this. This proposal doesn’t include any of that. We’re pushing this through because we want to pay our bills.”

Gehrig said tweaking the figures somewhat on the proposed room tax rate proposal could provide an impetus for jumping into sports marketing while achieving the other goals as well.

“We need to consider going from 2 percent to maybe 2.2 percent,” he said. “That would leave roughly $750,000 to start planning and building a sports facility. That would allow us to pay our bills and invest in our future. We have to suck it up and identify this trend and start acting on it.”

James said he could not support the motion to approve the room tax hike until the youth sports marketing concept was fully vetted.

“During the tourism commission meeting, I thought it was clear we need to have a discussion on sports marketing,” he said. “I’m not ready to support this motion until we have a real discussion on how much of this to spend on sports marketing.”

Knight said she agreed with exploring the youth sports market, but said it could be a tough sell for the taxpayers to dedicate funds to what would likely be an off-island facility.

‘It’s an amazing opportunity, but we need to sell it,” she said. “How can we justify spending say $2 million a year on something outside Ocean City? I think it’s a good idea and we should do it, I just think we’re going to need to sell it to the taxpayers.”

Gehrig pointed out the town and its residents and visitors have been adamant about alternatives to some of the existing special events in the resort.

“We need to have a plan to fill our rooms,” he said. “You think the residents wouldn’t like that? You think they wouldn’t like to see some of these less desirable events with burning rubber in the roads go away because they couldn’t get rooms?”

Vacation Costs And Perception

Regardless of how the potential room tax revenue increase is spent, it will mean an increase on the bottom line for those who rent hotel rooms and other accommodations in the resort. It’s no secret Ocean City has wrestled with its value image in recent years and increasing the room tax would likely contribute to that. However, it’s also important to point out a half a percentage point increase would add one dollar to the cost of a room at $200 per night. For a multi-night stay totaling $1,000, the half-point increase would equate to five dollars.

Nonetheless, Knight pointed out Ocean City already has one of the highest average daily room rates (ADR) in peak season among similar destinations. She questioned if the typical family with a couple of kids playing in a soccer or lacrosse tournament in Ocean City would pay the high peak-season rates.

“We have the highest average daily room rate in our concept,” she said. “In July and August, we have rooms for $500 a night. I’m not sure what these families with kids are paying or what they’re used to paying, but I’m sure they aren’t spending $500 a night when they go to tournaments in Ohio and Pennsylvania. I love the concept, I just think we need more information.”

Dare said Ocean City’s room tax rate was among the lowest compared to other destinations, yet the ADR in the resort was considerable higher.

“We have one of the lowest room tax rates, but a higher ADR,” he said. “It’s not about the room tax rate. In the big scheme of things, its not that big a deal. It might mean another $5 on a typical stay. We know it’s the right decision to go from 4.5 percent to 5 percent on the room tax rate.”

James pointed out supply and demand drive the ADR in Ocean City during the season, and with more and more hotels coming on line, the supply could outstretch the demand. He also pointed out the roughly $800,000 pitched during the debate as a shortfall in meeting the cost of providing services was a function of poor budgeting and not the room tax rate or ADR.

“We’ve seen a 10-percent increase in the number of hotel rooms in the last two years,” he said. “I think you’ll see the ADR go down because of that. It’s a simple supply and demand thing. I think we’re raising the room tax rate because we didn’t meet our budget.”

Martin took exception to James’ notion the $800,000 or so shortfall was the result of poor budgeting.

“I wouldn’t say that,” he said. “We’re at a point where we’re getting strapped by things out of our control like the minimum wage increase, for example. We’re going to see a $15 per hour minimum wage for our part-time seasonal employees and there are other factors we don’t control. We’ve done a lot of great things while keeping our tax rate low. We made it through last year without raising taxes. What we can do with this increase is pay for the services required by people who use them.”

Knight summed up the debate by pointing out a failure to increase the room tax rate would potentially result in other measures to make up the reported $800,000 shortfall.

“If we don’t make up the $800,000, the only other way we can make up this money is by raising taxes, to charge for parking all over town or to decrease services,” she said. “That’s all part of this equation. How are we going to make up this money if we don’t do this?”

End Game

During the course of the hours-long debate, several motions were made and later tabled. Others failed to pass while one ultimately gained unanimous approval. For example, DeLuca’s motion to approve the proposed room tax hike with an effective date of July 1, which he made right from the outset, was voted down by a 4-3 vote with DeLuca, Knight and Dare in favor, and Gehrig, Paddack, James and Martin opposed.

Ayres’ point about needing the approval of the County Commissioners for the proposed room tax change sparked a motion late in the meeting to have Mayor Rick Meehan send a letter to the county commissioners to begin exploring the request to see if the county elected at least concurred with the concept. That motion passed on a 5-2 vote with Gehrig and James opposed.

Finally, Dare made a motion to have town staff begin preparing information on a potential economic study of the youth sports marketing issue and perhaps begin to prepare requests for proposals. That motion passed unanimously.

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.