OC Councilman Questions Room Tax Review Findings

OCEAN CITY — A historical review this week of the town’s room tax over the last decade or so sparked a lively debate about where the revenue should be dedicated.

Budget Director Jennie Knapp on Tuesday provided a comprehensive review of the history of the town’s room tax and where the revenue is distributed through a formula approved by the Mayor and Council by ordinance. In 2007, the town’s room tax rate was increased from 4% to 4.5% by ordinance and 2% of the total room tax revenue was dedicated to advertising and marketing.

In 2020, the Mayor and Council raised the town’s room tax rate from 4.5% to 5% with the same 2% of the total revenue dedicated to advertising and marketing. According to statistics provided by Knapp on Tuesday, in 2007 when the ordinance changed, the total room tax collected at 4% was around $10 million, and the advertising budget was at about $1.7 million based on the 2% formula.

In fiscal year 2021, the statistics show the advertising budget as a percentage of the room tax has gone from 17% to around 40%. Knapp reported there was a funding gap between property tax and room tax revenue allocated to the general fund in the last decade. Knapp said more and more offseason special events required more police and fire crews, public works, trash collection and beach and Boardwalk cleaning, for example.

As the Mayor and Council considers another increase in the town’s room tax rate, it was suggested the formula that dedicates a certain percentage to advertising be reviewed. By way of background, the town cannot increase the room tax rate. The Worcester County Commissioners must first approve a rate increase, which is then forwarded to the General Assembly. The latter is largely a formality because it’s essentially a local issue.

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Knapp said the increase in the room tax rate over the years and the steady increase in room tax revenue has achieved the town’s desired results. However, she suggested because of the increase in special events, resulting in more strain on the budget in the form of a need for police, fire, paramedics and public works in the offseason, perhaps more of the gross room tax revenue should be directed to the general fund.

“It’s accomplished what we hoped it would accomplish,” she said. “It’s become the second biggest revenue source.”

However, Councilman John Gehrig took exception to the concept of diverting more of the room tax revenue into the general fund to cover increased expenses.

“This was all brought up because there was a fundamental dilemma on how we invest money,” he said. “In the formula we all say has worked great, the room tax is paid for by the visitors. When we raised the room tax by a half-a-percent, should the increase go to the general fund?”

It’s important to note the town’s stated goal for fund balance, or a rainy day fund of sorts, is 15%, although in recent years the Mayor and Council have expressed a desire to grow that to 20% or beyond. During Tuesday’s work session, it came up on separate occasions the fund balance in the current fiscal year had grown to about 35%. Gehrig said the ordinance is clear about the percentage of room tax dedicated to advertising and there was room in the budget to fund expenses caused by added special events.

“Right now, the ordinance is very specific,” he said. “We’re talking about raising the room tax again. My opinion is we should sprinkle it around everywhere. We can reinvest it in our product. Every time we raise room tax, let’s have a formula in place. We act like room tax is not paying for any of these things.”

Gehrig said the town made tough choices during a budgetary downfall a few years back and those changes that are still in place are paying dividends.

“Cutting expenses is good business,” he said. “We right-sized the government. When we can’t afford things, they have to be cut. That’s a positive thing. We made cuts, but we were still able to clean the streets and clean the beaches and maintain public safety.”

Knapp said Gehrig was incorrect about the perceived budget gap and defended her statistics and opinions.

“This is not cherry-picking numbers,” she said. “This is not about you and it’s not about me.”

Gehrig said the percentage of room tax dedicated to advertising was the catalyst for the steady increase in revenue over the last 10 years or so.

“How have we grown room tax?” he said. “It’s from advertising. Revenue minus expenses equals gross revenue. Isn’t that how to generalize this? It’s the same for a business or a household. To say we have a funding gap is misleading. The goal for fund balance was to get from 15% to 20%. Now, we’re at 36%.”

Council President Matt James attempted to diffuse the growing tension by pointing out the review of the history of the town’s room tax and associated revenue was meant to be a jumping-off point for a discussion of raising the rate again.

“I wanted to start the second part of the process,” he said. “That’s why I wanted this historical review, so we could all start on the same page.”

However, Gehrig continued to assert an alleged funding gap was disingenuous when the town’s fund balance was at an all-time high.”

“I guess my point is to say we have a funding gap is incorrect when we have a 36% fund balance,” he said.

City Manager Doug Miller intervened on behalf of Knapp, who left the council chambers briefly at one point.

“This is not an inquisition,” he said. “For over an hour, you’ve been hammering away at her.”

Gehrig asserted the town would be violating the room tax ordinance if it was decided to dedicate more of the revenue to the general fund. He pointed out the town was in the process of interviewing an independent auditor and that person should report directly to the Mayor and Council.

“We’re in violation of our own ordinance,” he said. “Why do we even have an ordinance if we clearly violate it? I think we should remove the $400,000. That auditor needs to review you guys and reports to us. Things are happening we don’t know about.”

Council Secretary Tony DeLuca said he supported the current formula and made a motion to pause the search for an independent auditor until it could be determined whom that person should report to. The motion included exploring the timeline for the next proposed room tax hike. The motion passed 5-1 with Councilman Peter Buas opposed and Councilman Lloyd Martin out of the room.

“I support the 60%-40%,” said DeLuca. “I like the term sprinkle it around. It’s all about more fire, more police and more public works. You all know I’d like another half-percent. I want to know the timeline for doing that. We need to know what we need to know the sequence with Worcester County and Annapolis to have that in place by January 2023.”

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.