The new rate takes effect in the fall for property tax bills due in January.
The council voted 6-1, with Bill Ferguson opposed, to approve the budget.
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"The constituents of Ward 1 are economically strapped, and any more increase in taxes will be a burden for them," Ferguson said.
The tax increase will raise an estimated $725,000 in new revenue. About $225,000 of that amount will be used to pay for future public-improvement projects that have yet to be identified.
The shift was made following comments from several council members that more be spent for "tangible, substantive" projects that show "an investment in the future," as opposed to operating costs.
Town manager Steve Riley said the rest of the money raised by the increase will be used to restore money for beach-park maintenance and operations. Council last year voted to use beach preservation fees to help pay for long-term beach renourishment.
"We need to pause and remind ourselves that we have been making operational cost cuts, and continue to look for more," Riley told the council. "But this budget adds significant new costs that boost the total expenditures."
Included in that "boost" is $200,000 for a consultant to help the town rewrite its land-planning, zoning and building standards to spur redevelopment.
"These, too, are investments in our future, but they also add over $1 million in new expenditures," Riley said.
Supporters of the tax increase say more money will also be needed later to pay for projects such as improving the island's tourist and recreational areas.
Realtors and residents who oppose the tax increase say it won't help a beleaguered real estate market, is not needed to maintain essential services and comes as families and businesses have cut back because of the recession.
"We must stay the course of revitalization and renewal that we all agree is critical to our future," Mayor Drew Laughlin said. "... Today is not the day to demand that taxes be the only important factor ... and a significant reduction in levels of service for our residents is not prudent on our part."
The town's millage rate decreased from 31 in 2004 to 19 in 2006. It was raised to 19.36 in 2009 and dropped to 18.54 in 2010.
The new rate is 19.33.
Next year's budget also includes a 1-percent merit raise for town employees. Pay was frozen in 2009 and increased 1 percent last year.
Town employees do not receive cost-of-living increases.
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