OC Council Votes 4-2 To Alter Room Tax Distribution Formula

OC Council Votes 4-2 To Alter Room Tax Distribution Formula
File photo by Chris Parypa

OCEAN CITY — Resort officials this week approved on first reading an ordinance gradually scaling up the percentage of collected room tax dedicated to marketing, but not before a larger debate about tax revenue promoting the town as a tourism destination.

The Mayor and Council had before them on Monday an ordinance altering the formula for how a percentage of room tax generated in the resort is distributed to marketing and advertising. By way of background, Ocean City’s room tax in 2019 was raised from 4.5% to 5% with about 44% dedicated to marketing and advertising and 56% dedicated to the town’s general fund to help offset the cost of increased tourism, such as increased fire and police services, public works, salaries and overtime, for example.

There are essentially two schools of thought regarding the distribution of room tax revenue in the resort. On the one hand, dedicating more of the room tax revenue to marketing and advertising will only grow the revenue source by attracting more visitors to Ocean City. On the other hand, attracting more visitors to Ocean City, particularly in the shoulder seasons and offseason with more and more special events puts additional strain on essential services such as police, fire and paramedics, public works and other departments.

Somewhere in the middle is a balance on how best to distribute room tax revenue to increase tourism while maintaining the high level of services visitors and residents expect. That is the subject of the current ordinance under consideration. At their Nov. 30 work session, the Mayor and Council were presented with three options on how best to distribute increased room tax revenue.

The preferred option at that time was to continue to direct 2% of the increase in room tax revenue to destination marketing, advertising, promotions, sponsorships and special events and the like for fiscal years 2022 and 2023, while scaling up the percentage for that purpose to 2.1% in fiscal year 2024 and 2.2% in fiscal year 2025.

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The council last week ultimately voted on that option and directed legal counsel to prepare an ordinance codifying the changes. On Monday, the council had before them an ordinance on first reading that would, if passed, make the proposed changes a reality.

A third option on the table, which got little traction when the proposals were laid out last week, would have set the percentage of room tax dedicated to marketing and advertising at a straight 2.6% in out years. When the ordinance was presented on first reading on Monday, Councilman Frank Knight pointed out the recent approval of an expansion of the recently-created tourism and business development department and the subsequent addition of new positions.

Knight on Monday questioned if the newly-created positions would be funded through the tourism and business development department. He said option three as presented last week got little or no discussion and he could not get behind option two as presented in ordinance form on Monday.

“Are all of these salaries for the new people we’re hiring coming from the general fund?” he said. “I really was hoping we’d discuss option three, which never came up for discussion. I won’t be supporting this because I really feel the tourism division needs to support itself.”

After considerable debate, the council voted 4-2 with Knight and Councilman Peter Buas opposed and Councilman Lloyd Martin absent to approve option two as presented on first reading. Before the vote, however, there was larger debate about room tax revenue in general and how best it should be distributed in the town’s coffers.

Local resident and former councilman Vince Gisriel reiterated a point he made last week about any tax revenue being dedicated to marketing and advertising, which he believes should be a function of the private sector. Gisriel pointed out significant primary industries in neighboring communities.

“The other day I indicated my lack of support for government being involved in advertising and marketing,” he said. “Probably the biggest single industry in the history of Salisbury is Perdue Chicken and the city council there doesn’t do anything over and above normal government function to help that industry. For our neighbors to the north in Selbyville, Mountaire is probably the single biggest industry, and I’m not aware that the city council of Selbyville is doing anything other than normal government function. I don’t see anything different between that and our tourism industry here.”

Gisriel, as he is wont to do, pointed out dedicating more room tax revenue to the general fund could ease the strain on resident and non-resident property owners in terms of property taxes.

“We collect $40-some-million dollars in property tax and when that money comes into the coffers, it’s the collective community’s money,” he said. “Because we have an admittedly unique situation here, we have to ramp up for the summer. Services are unprecedented compared to everyday life in the winter.”

Gisriel said beyond property taxes, the room tax was the second largest source of revenue for the town.

“Our secondary source for income is the room tax,” he said. “When it comes into the pot, it should be used to pay for services that need to be done. Anytime we use any of that room tax beyond infrastructure and government, it’s beyond, in my opinion, what ought to be done with that revenue.”

Ocean City Hotel-Motel-Restaurant Association (HMRA) Executive Director Susan Jones countered without a robust tourism industry, and the associated room tax collected, the town’s general fund would be strained. Jones also pointed out the significant amount of property tax derived from tourism-related businesses.

“We value the fact that you guys invest in tourism,” she said. “I also would remind everyone that a large amount of that property tax that comes in comes from tourism-related businesses, and the room tax revenue and the food tax. It adds up to a lot of money and we wouldn’t be able to have an operating general fund if we didn’t have tourism business. So, it’s really about investing in tourism. I thank you for your support of this ordinance.”

Before the 4-2 vote, Knight reiterated his desire for tourism and business development to be self-sufficient.

“I thoroughly believe in funding tourism,” he said. “It’s our only industry. I just don’t think this is the way to do it. I think tourism should be self-funded.”

When it came time for council comments, Councilman Mark Paddack attempted to rebut Gisriel’s assertion the tourism industry in Ocean City was akin to the poultry industries in places such as Salisbury and Selbyville, for example.

“I would like to address former councilman Gisreil’s concerns,” he said. “Ocean City is not a chicken farm. Ocean City is a destination that has over eight million people pass through the town in any given year. They come here for the beach, they come here for the restaurants, the amenities and all of the other wonderful things that the Town of Ocean City hast to offer.”

In a side debate, the issue of raising the room tax rate again arose. In 2019, the room tax was raised from 4.5% to 5%. By way of background, room tax is essentially a tax rate set by Worcester County and applies throughout the county, but because of the unique nature of Ocean City as a tourist destination, it is typically couched in terms of the resort because of lodging volume.

Altering the room tax rate requires approval first from the Worcester County Commissioners and ultimately the state legislature. Council Secretary Tony DeLuca has been an advocate for hiking the room tax again from the current 5% to 5.5% and on Monday urged his colleagues to get the ball rolling on the process because of the various layers of approval need to affect the change.

“As everyone knows, I’ve been discussing January 2023 as an effective date shooting for an increase to 5.5%,” he said. “We have 5.5% staggered over certain dates — half a fiscal year, a full fiscal year — and I’m really concerned about meeting our January 2023 timeline.”

DeLuca asked for a clarified timeline to affect the room tax hike.

“What I’m asking is what happens next?” he said. “I know that the mayor needs to discuss it with a few elected officials at the state level. Once that happens, what’s next? It goes to the county commissioners and once that’s approved, it goes to Annapolis.”

Councilman John Gehrig pointed out the proposed increase in the room tax is essentially a county issue.

“Really, what we’re asking for is the ability to raise it,” he said. “We’re not asking to actually raise it. It’s a county tax. Our ask isn’t to raise the tax. It’s to ask the county to ask the state for the ability to raise the tax.”

DeLuca said he expected little opposition to another increase in the room tax rate, but wanted to set the process in motion as soon as possible to prevent delays. When the room tax rate was last raised two years ago, the change didn’t go into effect until after large portion of the season had passed, meaning potential revenue was left on the table.

“The county has so much to gain, and perhaps the state does,” he said. “I just don’t know why it would be an arbitrary no. My concern is the timeline, not the answer. The timeline is really squeezing, and I’ve been talking about this for a lot of years.”

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.