Gov. Moore Proposes Major Tax Changes Despite Budget Deficits
Facing an estimated $3 billion budget gap in fiscal year 2026 and forecasts of a growing deficit over the next five-year period, Governor Wes Moore has included approximately $1 billion in his proposed taxA Tax is a mandatory payment collected by local, State, and National governments from individuals and businesses to cover the cost of general government goods, services, and activities.
His budget proposal includes increases. The package includes changes to individual income tax (such as restructuring tax bands. A tax band is the range of incomes that are taxed at a given rate, which usually differs depending on filing status. In a progressive system of individual or corporate income taxes, rates increase as income increases. The federal income tax system has seven brackets for individual income; the corporate income tax is flat.
and deductions increase the top marginal individual taxAn individual tax (or personal tax) is imposed on the wages, salary, investments, or any other form of income that an individual or household earns. The U.S. has a progressive income-tax system where rates increase as income increases. The Federal Income Tax was created in 1913, with the ratification 16th Amendment. Individual income taxes, which are only 100 years old but are the biggest source of tax revenue for the United States, have been around since 1913.
rate and introducing surtaxA Surtax is an additional tax imposed on top of a business or individual tax. It can be flat or progressive. Surtaxes usually fund a particular program or initiative. Revenue from broader-based taxation, such as the individual income taxes, is used to fund many programs and services.
capital gains income), the repeal inheritance taxes. An inheritance tax is imposed on an individual’s estate or assets transferred from their estate to the heirs. The inheritance tax exemptions are based on the amount of the gift, not the estate size.
offsets by wider applicability of estate taxesAn estate tax is levied on the net value of a person’s taxable estate at the time of their death, after any credits or exclusions. The estate pays the tax before assets are distributed.
, medium term corporate taxA corporate tax (CIT), is imposed by the federal and state governments. Many companies are exempt from the CIT, as they are taxed under the individual income taxes.
reforms and modifications to excise tax. While several elements of the package are structurally sound and align with the principles of simplicity, transparency, and neutrality, increasing the top marginal individual income tax rate and introducing a capital gains surtax could hurt Maryland’s competitiveness, especially given the wave of income tax reforms implemented in other states in recent years.
Individual Income Tax Changes
The most important revenue raisers in Governor Moore’s tax proposal are individual income tax provisions. The proposal includes several structural changes, including the replacement four tax brackets by a single 4.7 % rate, two additional brackets (with rates of 6.5 % and 6.25 %), a 1 % surtax on capital gain income for households earning over $350,000 in federally adjusted gross IncomeFor individuals, gross pay is the total income before taxes, including wages, tips, investment, interest and other forms of income. For businesses, it is total revenue less cost of goods sold.
, and several modifications to standard and itemized deductions and tax credits.
According to the budget documents, these changes would generate close to $820 million for the state’s general fund in fiscal year 2026 ($691.5 million from the restructuring of brackets and deductions and $128 million from the temporary capital gains surtax).
Individual income tax rates and brackets under the current system and the proposed tax changes are shown in the table below. The number of tax brackets will decrease from eight to seven. The top marginal rateMarginal tax rate is the additional tax that must be paid for each additional dollar of income earned. The average tax rate is calculated by dividing the total tax paid by the total income earned. A marginal tax rate of 10 percent means that 10 cents from every dollar earned will be taxed.
The bracket increases by 0.75 percentage point (from 5.75 to 6.5%), and the four lowest tax brackets are combined into one. The marriage penality is also increased. A marriage penalty occurs when a household’s overall tax bill rises due to a married couple filing jointly. Marriage penalties are imposed when two people with similar incomes get married. This is true for couples of all income levels.
remains in the new system, perpetuating the unequal treatment of single filers and married couples filing jointly, favoring the former tax status.
Current and Proposed Individual Income Tax Rates and Brackets in Maryland
Other elements of the proposal include eliminating itemized deductions and doubling the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. The standard deduction is a set amount that reduces a taxpayer’s taxable income. It is determined by the government.
(which in 2024 would be $2,700 for single filers, and $5,450 if married couples filed jointly) while also removing phase-in of the standard deduction. This is a good step and aligns with the principles that promote simplicity and transparency. It is better to reduce deductions than to raise rates. Notably, even the modified standard deduction in Maryland would still be low compared to Virginia (currently $8,000 for single filers) and DC (currently $15,000 for single filers, reflecting the District’s conformity with the federal tax code).
The proposal does not address inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck will cover less goods, bills, and services. It is sometimes called a “hidden” tax, as it makes taxpayers less wealthy due to increased costs and “bracket-creep”, while increasing government spending power.
adjustments to any income tax provisions. In a volatile economy with higher inflation than the pre-pandemic period, the absence such adjustments could result in unlegislated tax hikes in future years. To avoid unintended tax burdens, it is important to adjust brackets and standard deductions annually for inflation. This surtax is temporary and will expire in 4 years. Maryland would be the second state to implement a surtax if it were to become law. Minnesota is currently the first. This change would not impact individuals with federal adjusted gross earnings below $350,000, but it would negatively affect high earners – the group most responsive to tax increases and mobile. Recent academic studies have emphasized this point, and IRS migration data supports it. If the goal of the proposal is to accelerate economic growth in the state, it may be challenging to achieve if some of the most productive and entrepreneurial residents have more reasons to relocate to other jurisdictions.
In total, high earners (individuals with an adjusted gross income of $1 million or more) living in counties with a 3.2 percent local income tax should expect their combined state marginal tax rate to reach 10.70 percent for some income. This includes the top state rate of 6.5%, the local rate at 3.2 %, and the surtax of 1 % on capital gains. This difference is important if Maryland wants to attract more high-net-worth people, especially since the state is experiencing net outmigration, and ranks in the bottom ten by this metric according to the latest data from IRS and U-Haul. The District of Columbia cannot tax nonresident income. This has historically been a factor that encouraged DC workers to move to Maryland or Virginia. Should Maryland’s income tax rates begin to approximate the District’s, that advantage–weighed against other considerations, including proximity to work–could disappear.
Other Tax Changes
Corporate income tax changes are also included in the package, but they take effect in fiscal year 2028, meaning there will be no immediate fiscal consequences in fiscal year 2026. The corporate income tax rate will decrease from 8.25 percent to 7.99 percent over a two-year period starting in 2028. The state would also adopt water’s-edge combined reporting which is much less problematic than the global combined reporting that was proposed in Maryland last. Maryland is the only state that imposes inheritance and estate taxes. This change would be funded by lowering the estate
tax exclusionA tax exemption excludes income, revenue or even taxpayers altogether from tax. The Internal Revenue Service (IRS) grants tax-exempt status to nonprofits that meet certain requirements. This allows them to avoid paying income tax.
, which is not ideal but keeps this proposal revenue neutral.
Several excise taxes would see higher rates under the proposal, specifically the sports wagering tax (increasing from 15 to 30 percent) and the table game tax (rising from 20 to 25 percent). These changes are expected to generate $130 million in revenue for the state general fund. Additionally, the governor proposes increasing the cannabis tax rate from 9 to 15 percent, starting in fiscal year 2027.Finally, the bill imposes a $0.75 tax on deliveries, with certain exemptions. Colorado and Minnesota impose retail delivery charges, but at lower rates ($0.28 or $0.50). The Proposal Is Sound?While some of the proposed changes are in line with sound tax policy principles (e.g. doubling the standard deductibility, reducing income tax brackets and eliminating inheritance tax), the proposal as a whole will impact Maryland’s potential for economic growth. While raising $1 billion in taxes is bound to have an impact on the economy, some of the options the administration chose were more harmful. This plan represents a more responsible approach than tax increases proposed in other states in recent years, as it does not rely on gimmicks or lean heavily on novel tax policies.
Sales taxes, which are entirely omitted from the proposal, are generally less damaging to economic growth than income taxes–the main revenue raiser in the plan. Maryland’s
sales TaxA sales tax is imposed on retail sales of both goods and services. It should, in theory, apply to all final consumption, with few exceptions. Many governments exempt certain goods, like groceries. Broadening the base, by including groceries, would allow rates to be lower. A sales tax should exclude business-to-business transfers that, when taxed cause tax pyramiding.
The
tax rate of 6 percent falls below the national average, especially since Maryland localities, unlike most other states, do not have the authority to impose local taxes. A narrow tax base can be inefficient and non-neutral. A broad tax base allows for lower tax rates and reduced administration costs.
has a relatively narrow base. Expanding the sales tax base to include consumer services or modestly increasing the rate presents an opportunity to raise much-needed revenue in a less distortive way while preserving Marylanders’ incentives to live and work in the state–factors that are likely to be negatively affected under the current proposal.
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