OCEAN CITY — After carefully reviewing and debating the options on the table, resort officials this week approved a gradual scaling up of the percentage of the town’s room tax dedicated to marketing.
In October, the Mayor and Council got an historic overview of the town’s room tax and how the revenue generated was distributed to the advertising and marketing budget and the general fund. As part two of that discussion during Tuesday’s work session, the elected officials were presented with three options on what to do with the room tax rate going forward in out years.
The first option was simply leaving the room tax rate dedicated to marketing at its current level of 2% for fiscal years 2022 and 2023. The second and preferred option was keeping the rate at 2% for fiscal years 2022 and 2023, scaling it up to 2.1% in fiscal year 2024 and again to 2.2% in fiscal year 2025. A third option, which did not get much traction, was raising rate to 2.6 %.
After considerable debate, the council ultimately voted on the second option.
While most agreed it was now time to increase the percentage again going forward in future fiscal years, there was still the issue of how best to distribute the anticipated increase in revenue. Earlier this year, the town hired new Tourism and Business Development Director Tom Perlozzo to overhaul the tourism departments under one umbrella and begin developing strategies on how best to market the town and all it has to offer.
In addition, the town is in the process of contracting a new advertising agency after 10 years, which could contribute to the shift in strategy. Currently, about 44 percent of room tax revenue is dedicated to marketing and advertising, while roughly 56 percent goes into general fund to help cover the cost of tourism, such as increased fire and police services, public works, salaries and overtime, for example. Perlozzo said those types of decisions would fall on the Mayor and Council.
“How it’s distributed is the issue as I see it,” he said. “We view this as a policy decision, not an operational decision. We need the flexibility to navigate the budget for advertising and marketing, for example. My recommendation is going to be Option 2. I don’t know that there is a department head in town that wouldn’t want more money.”
Councilman John Gehrig said the roughly 56-44 split has proven effective and suggested it remain in tact even with the proposed graduated increase in the room tax rate. Gehrig ultimately made a motion for Option 2, including a 40% share for advertising and a 60% share for the general fund.
“The formula has worked,” he said. “Let’s keep that intact. That’s where we are right now. Keep that intact until we know what we want to do.”
Gehrig explained the nuts and bolts of Option 2 and questioned if the timeline should be moved up for the graduated increases.
“The scaled option is not impacting the fiscal year 2022 or fiscal year 2023 budgets,” he said. “We’re talking about fiscal year 2024. I can’t say I’m happy about that because it seems like it’s two years too late. I can go along with the scaled option. My concern has always been how do we dedicate those funds.”
Gehrig said he favored keeping the current distribution formula intact, even if the room tax rate was hiked.
“If something works, I don’t know if we need to mess around with it,” he said. “We have 56% of the room tax to help pay for the cost of tourism in terms of public safety and public works, for example. The other 44% covers the cost of doing business. That’s advertising and marketing.”
In response to a question if the future room tax hike would cover the cost of adding the requested and approved new positions to his department, Perlozzo said he was not entirely certain all of that would be covered by the increase.
“It doesn’t address everything,” he said. “It does address many of the things we’ve talked about with our tourism strategic plan. Generally speaking, I’m not sure where we’re paying for the people we’re going to be bringing in. If it’s coming out of room tax, that’s something we need to figure out.”
When the room tax was last increased two years ago, the effective date was moved back to January because resort businesses had already set their summer rates. Gehrig said the well-thought out plan for the graduated increases would allow the business community to adjust.
“It gives clarity to our business community,” he said. “All of our businesses will know exactly what’s going on.”
Council Secretary Tony DeLuca, who seconded Gehrig’s motion for Option 2, said he supported the formula for “sprinkling around” the anticipated increase between marketing and advertising and the town services needed to support increased tourism. He also made it clear he wanted a defined timeline for the graduated increases in the room tax.
“I certainly support the scaled version,” he said. “I think sprinkling it around really covers the cost of public works and public safety. I don’t want to lose sight of the fact we need to lay the timeline out. I want it to be very clear. We still will need to go to the County Commissioners and Annapolis.”
Councilman Peter Buas questioned if there was a plan in place on how best to utilize the anticipated increase in room tax revenue.
“With the ultimate increase to 2.2%, is there a plan on how to use the increase in the advertising budget?” he said.
Perlozzo said a defined plan would emerge when the marketing strategy shifted and the new advertising agency was hired.
“There really is not a plan,” he said. “Originally, we assumed that the same formula for that half-percent was going to be used. We hypothetically don’t know what’s going to happen between now and 2024. We will have a new ad agency and they’re going to need funds for this versus that.”
Buas said targeting the room tax revenue was somewhat nebulous because it was uncertain at this point what the plan will be.
“You hire an ad agency that has a plan and they need X amount to get the job done,” he said. “It’s almost like we’re funding something we don’t know exists right now.”
Perlozzo said while there is not a specific plan in place, there was an overall goal and direction going forward.
“The bottom line is we will have a change in our marketing strategy,” he said. “We will be speaking with and engaging with markets we have not done so in the past. We have traditionally cast a broad net. We want to fill in the shoulder seasons and the offseason. We have typically not spent any money after September 30 or before April 1. Meetings and conventions are perfect examples of an $18,000 budget, although there is a $7 million advertising budget, where we have not spent any money trying to fill up the convention center weekdays.”
Buas countered it appeared to be counterintuitive to hike the room tax rate without a specific plan on how to spend the revenue.
“It just seems premature, that’s all,” he said. “We need to see who the ad agency is, what they’re targeting and what their ask is. I certainly support year-round advertising. I’d just like to work from the front end and not the back end.”
For his part, Gehrig said the anticipated increase in room tax revenue would afford the town and its tourism department the flexibility to explore new marketing strategies, or seasonally-targeted strategies.
“Typically, we’ve had one campaign, whether it was Rodney or the Fun Family,” he said. “We have a very diverse and broad visitor group. This will give us the flexibility to do that down the road.”
Even before the Mayor and Council took up the room tax increase debate, members of the public were invited to weigh in. For example, Ocean City Hotel-Motel-Restaurant Association (HMRA) Executive Director Susan Jones said her group supported the increase.
“This is an issue near and dear to our hearts, and it’s of extreme importance to us,” she said. “The idea is it is time to grow the room tax. A lot of destinations would like to be in the boat we’re in.”
Jones said the HMRA also supported keeping the room tax revenue distribution formula in place.
“We’ve been able to grow the average daily rates and occupancy rates,” she said. “We believe this is the formula that works. The pandemic changed vacation habits. People didn’t fly, but they got in their cars and came to Ocean City. This is how we continue to grow. The momentum is here now.”
Former councilman Vince Gisriel said dedicating more of the room tax revenue to the general fund could result in a reduction of the property tax rate for local residents. In that way, the cost of tourism would be borne by the visitors. Gisriel also said the town should not be in the business of advertising.
“I want to clear the air,” he said. “That half-percent increase generated more revenue that was ever anticipated. The advertising budget grew at a faster pace than the general fund budget. The function of government is not advertising and marketing. That’s a function of the private sector.”
However, Councilman Mark Paddack said later the unique nature of Ocean City as a tourist destination made advertising and marketing a necessity in response to Gisriel’s earlier comments.
“Ocean City is extremely unique in our clientele and what we offer,” he said. “Ocean City does need to be in the business or promoting our community. Our industry is tourism.”
After considerable debate, the council voted 5-1 with Buas opposed and Councilman Lloyd Martin absent to approve the Option 2 plan for a graduated increase in the room tax rate by 2025.
Mayor Rick Meehan praised his colleagues for their decision.
“I’m glad we resolved this today,” he said. “What we’ve done is solidify our partnership with the business community.”