Cape Charles Raises Taxes To Address ‘Spending Problem’

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By Stefanie Jackson – The Cape Charles Town Council unanimously passed its fiscal year 2022 budget of more than $9.4 million June 24, including tax rate increases that were unpopular with some citizens but deemed necessary by town staff.

Councilman Steve Bennett, who did not attend the Town Council meeting but submitted written comments, said the tax rate increases were “not primarily due to COVID but due to previous many years of deficit spending without corresponding tax increases.”

The town’s real estate tax rate changed from about 27 cents per $100 of assessed value to about 31 cents per $100 of assessed value, an increase of approximately four cents or 16%.

The meals tax increased half a percentage point, from 5% to 5.5%.

The transient occupancy tax (TOT) increased three-tenths of a percentage point to 4%, plus a flat fee of $1 per night for a room in a hotel or a bed-and-breakfast, or $4 per night for a short-term rental home.

Ryan and Jen Pattan, who run a short-term rental in Cape Charles, had submitted a written public comment that said the period from 2020 to 2021 was a “record-setting” year for vacation rentals, meaning the town is already receiving more TOT taxes, so raising tax rates is unnecessary.

“Please don’t vote to discourage vacation rentals by singling them out for special taxes,” the couple wrote.

Jennifer Jackson and Rachel Leyco, who own a duplex in the historic district, wrote, “We have seen the amazing growth in the town and also witnessed the drain on resources created by the town’s popularity as a vacation destination and the increasing number of vacation rentals.”

They noted that tourists don’t necessarily make good neighbors and suggested instead of raising taxes to increase revenue, the town should impose “fines on those who are actually breaking the rules – for example, noise, underage golf-cart drivers, speed, alcohol, parking, etc., and/or the homeowners who rent to them.”

Ellen Moore believed that the proposed “flat tax” was a fair solution because guests, not homeowners, would be paying the fees.

Stuart Smith wrote that the 16% real estate tax rate increase is “massive,” especially considering that property values also have increased. 

Cape Charles has a “spending problem,” and by the town manager’s own admission, expenditures have been about 2% higher than revenue for many years, Smith wrote.

Revenue from all sources increased nearly 50% between 2012 and 2019, “so spending hasn’t been totally constrained by property tax revenues,” he said.

The Town Council must cut spending, including budgeting expenditures below revenues for a few years to build up a reserve fund, Smith added.

Jo Ann Bawiec approved of the higher TOT taxes because short-term rentals change the quality of life for full-time residents, many of whom are retired.

“It seems that for five months out of the year, the keys of our town are turned over to the tourists” and “quiet evenings on the porch seem unlikely,” she wrote.

Some short-term rental homes could be considered “mini hotels,” accommodating 16 guests or more at one time. “Recently, one rental property had five extended cab trucks with three boats pulled in for their stay,” Bawiec said.

More guests create more issues with noise, trash, parking, security, and safety; town staffing resources appear “maxed out” and short-term rental owners should bear some of the additional expense, she said.

Bawiec suggested instead of raising taxes, the town should increase revenue by charging for parking like other beach towns.

Town Manager John Hozey responded to the public comments heard that evening and previously at a public hearing.

He rejected a claim that Cape Charles is supported largely by TOT taxes. Taxes on real property account for more than 42% of the town’s revenue, but TOT taxes account for less than 7% of revenue.

Hozey noted that a higher flat tax is charged for short-term rentals because they drain more town resources than hotels or bed-and-breakfast establishments.

Rooms in vacation rental homes accommodate more occupants on average than bed-and-breakfast or hotel rooms, placing a bigger load on town services such as water, sewer, and trash collection.

A short-term rental, unlike a hotel or bed-and-breakfast, does not have a manager on the property during a guest stay, so if a problem arises, it’s the police department, public works, or town manager who responds, Hozey added.

Furthermore, short-term rentals are not required to supply parking like hotels and B&Bs.

Vacation rental homes also have full kitchens, and guests who stay there are likely to contribute less revenue to the town in meals taxes, Hozey pointed out.

To generate the same amount of revenue without charging the flat tax on guest accommodations, Cape Charles would need to increase its TOT tax from 3.7% to 6.14%. The average TOT tax in Virginia is 5%, Hozey said.

His tax rate proposals were based on data from 2019, not 2020, he added.

Hozey noted that the suggestion to cut spending before increasing taxes was “very reasonable,” but in the past it was difficult to examine spending by category because many different types of expenses were “lumped together.”

New spending categories have been added to the budget, including a debt service fund, capital fund, and special activity fund (to accept funds such as COVID-19 relief), making the budget more “transparent.”

According to an audit conducted in 2020, expenses were cut 23% between FY 2020 and FY 2021, Hozey said.

The Town Council approved the FY 2022 budget with the new tax rates, which will take effect Jan. 1, 2022.

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