First Look: Governor Combines Revenues, Cuts to Narrow Budget Gap

Gov. Moore’s budget proposal for fiscal year 2026 (July 2025–June 2026) makes a significant dent in the state’s looming shortfalls, with similar-sized contributions from tax reforms and budget cuts. The plan takes several positive steps to crack down on corporate tax avoidance and ask wealthy individuals to pay their fair share. These reforms are an important measure to protect Marylanders from much more drastic cuts to public services. At the same time, a more ambitious revenue package would do more to support the foundations of thriving communities across our state.

Note: This analysis is based on information available at the time of writing. While MDCEP is confident in the conclusions and recommendations presented here, specific numbers should be considered preliminary.

Context: Historic Shortfalls Approaching

Policymakers faced near-unprecedented fiscal challenges at the start of this year’s legislative session. Ongoing expenditures from the state’s general fund were expected to exceed ongoing revenues by nearly $3 billion in the coming fiscal year. This gap, known as the structural deficit, was projected to exceed $6 billion by 2030. Put another way, state analysts expected ongoing revenues to cover only 84% of general fund expenditures by the end of the decade, a worse outlook than the state faced during the Great Recession.

How did the state arrive at its current, precarious fiscal position?

• Maryland’s economy has grown more slowly than the United States overall in recent years, resulting in slow revenue growth. Maryland remains among the wealthiest states, and still has an employment rate that exceeds the national average.
• Rising costs throughout the economy have affected the state government just as much as they have affected families. Factors like fuel costs, health care costs, and a competitive labor market all make the same set of services more expensive to deliver.
• Lawmakers made a promise to Maryland’s children by passing the Blueprint for Maryland’s Future, a major, research-backed school funding reform. However, they took only incremental steps to raise the revenue needed to support this package. It has been clear for years that the plan requires significant new revenue to be sustainable.
• The budget challenges are not the result of reckless spending, as some have suggested, although the size of the state budget temporarily increased due to a surge of pandemic relief and other one-time federal funds. For example, just over half of the increase in general fund expenditures from FY 2016 to 2023 took the form of one-time reserve deposits and capital investments, precisely the approach public finance experts recommend for a short-lived revenue spike. After accounting for inflation and population growth, ongoing general fund expenditures increased by only 2.3% during this period. Meanwhile, policymakers in 2022 added more than $300 million per year on to the state’s existing senior tax breaks.

While considerable challenges remain, the proposal Gov. Moore unveiled this week nearly closes the general fund structural gap for fiscal year 2026 and reduces the FY 2030 shortfall by nearly half. The plan takes a mixed approach, with revenue increases and service cuts each accounting for about half the reduction.

Gov. Moore’s Revenue Plan: A Big Step in the Right Direction

Gov. Moore’s tax reform plan raises nearly $1 billion right away, primarily by asking the wealthiest Marylanders to pay their fair share. Over five years, new revenues in the governor’s plan may total $6 billion or more.

Here are the highlights of the governor’s tax package:

• Reduces working families’ tax responsibilities: Doubles the standard deduction all families can use to calculate their taxable income. Eliminates an unfair, convoluted system that limits the amount lower-income families can deduct. Slightly reduces the tax rate most families pay. About 60% of Marylanders will pay less in taxes under the proposal, according to administration estimates.
• Strengthens support for Maryland children: Improves the design of the state’s child tax credit by replacing the current eligibility “cliff” with a gradual phaseout. This offers modest additional support to some struggling families with young children, and removes a hurdle for families trying to plan for the future.
• Asks more of the wealthy few: Creates new tax brackets that apply to the small number of individuals whose taxable income after deductions exceeds $500,000 per year (or $600,000 for married couples). The plan levies a maximum tax rate of 6.5% on annual income exceeding $1 million (married: $1.2 million). Today, the 1% of Marylanders who take home more than $700,000 per year pay a smaller share of their income in state and local taxes than any other income group.
• Taxes income derived from wealth, not work: Temporarily levies a 1% tax on capital gains for those with annual income over $350,000. This asset-based income receives special treatment under federal law, worsening racial injustice and disadvantaging working people of all backgrounds. This reform sunsets after 2029.
• Simplifies income taxes: Eliminates itemized deductions, which complicate the tax filing process and may expose Maryland to unpredictable fallout from a second Trump tax cut package. Today, the wealthiest 20% of Maryland tax filers account for more than half of all itemized deductions. Among the other 80%, the vast majority already take the standard deduction, and some of those who currently itemize would likely pay less under the Moore plan
• Closes corporate tax loopholes: Adopts domestic combined reporting, a reform that prevents large, wealthy corporations from artificially shifting profits to low-tax states. More than half of states have already adopted this reform. The governor’s plan partially offsets revenue from this fix by reducing the corporate income tax rate. Today, Maryland derives a smaller share of state and local revenue from taxing businesses than any other state. Combined reporting takes effect in 2028, with rate cuts beginning in 2027.

The proposal raises additional revenue by increasing taxes on sports betting companies and casinos without expanding gambling, bringing cannabis taxes into line with nationwide norms, and making other smaller changes.

The evidence is clear that a fair, effective revenue system is consistent with a thriving economy:

• The bulk of empirical research finds little link between state tax policy and where people want to live. For most of us, factors like good jobs, affordable housing, great schools, pleasant weather, and being close to relatives are far more important than tax rates.
• Careful research shows that wealthy individuals relocate less often than others, and that taxes aren’t an economically important driver of where they settle down.
• Likewise, taxes are not among the most important factors when businesses decide where to locate. In surveys of business leaders, corporate taxes reliably rank lower in importance than factors like skilled workers, highway access, and quality of life – which all depend on public investments.
• An analysisby the Institute on Taxation and Economic Policy found that states with high statutory income tax rates saw faster per-capita growth in GDP, personal income, disposable personal income, personal consumption, and prime-age employment than states with no personal income tax.

Painful Service Reductions

Not all news in the governor’s proposal is good. The plan cuts the ongoing general fund budget by nearly $1.2 billion in the coming fiscal year, plus further cuts from the Blueprint for Maryland’s Future plan for improving public schools. Combined cuts over five years total nearly $7 billion (excluding savings from increasing the Medicaid deficit assessment on hospitals). Here is a sampling of services that will be hit hard:

• Public schools: About one-third of the governor’s planned budget cuts – $2.5 billion over five years – come from scaling back the historic Blueprint for Maryland’s Future school funding reform. Most notably, the proposal delays expanded collaborative planning time for teachers, a core component of the Blueprint framework. Because of the design of the school funding formula, this cut reduces “foundation” funding for all schools – the core amount of funding they receive based on enrollment – as well as targeted resources to support students with low family incomes, students with disabilities, and English learners.
• Disability Services: The budget proposal significantly reduces funding for the Developmental Disabilities Administration, including legislative changes to cut back services. The plan decreases support for the self-directed services program, which recently drew criticism for imposing new paperwork requirements with little advance warning, and eliminates the low-intensity support services program. These statutory changes alone sacrifice $20 million in federal matching funds.
• Child care: Under the proposal, the governor would have authority to impose a waiting list on child care scholarship enrollment, eroding recent improvements to the program. As recently as 2018, Maryland had one of the most ineffective child care scholarship programs The Comptroller of Maryland has identified child care access as a key barrier to our state’s economic growth. The impacts of this proposal may take more than one year to materialize.

Policymakers’ refusal to raise revenue sooner created a situation where some amount of short-term austerity may be unavoidable. This does not make service cuts any less harmful. Fortunately, Gov. Moore’s revenue plan limits the amount of damage both now and in future years.

But we are not out of the woods. The state is still expected to face a general fund structural deficit of more than $3 billion in FY 2030 – in other words, ongoing revenues are expected to cover only 90% of ongoing expenditures, below historical norms. Policymakers should do everything they can to shore up our revenue system today, or else further austerity measures likely lie ahead.

The Way Forward

Let’s be clear: Gov. Moore’s tax reform plan is a major step in the right direction. As introduced, the proposal is massively preferable to another year of inaction on revenue. At the same time, there are steps the General Assembly can take – based on the Fair Share for Maryland Act – to strengthen the governor’s proposal and protect the services that allow Maryland communities to thrive. Here are just a few of them:

• Crack down on offshore corporate tax avoidance: The governor’s plan to adopt combined reporting is the right choice. Expanding this reform to crack down on offshore tax avoidance – a variant known as worldwide combined reporting – would be more effective and likely raise significantly more revenue.
• Close the LLC loophole: Big businesses increasingly reduce their tax responsibilities by legally organizing as LLCs or other so-called pass-through entities. Taxing the largest such companies like corporations would level the playing field for real small businesses and likely raise $700 million or more per year.
• Target tax cuts to leave no one behind: The governor’s plan includes two proposals that lower tax responsibilities for big businesses and wealthy individuals. First, the proposal cuts the corporate income tax rate from 8.25% to 7.99% (equivalent to about $61 million if it were in place this year). Because these cuts begin a year before combined reporting takes effect, they will actually reduce revenue for the 2027 tax year. Second, the plan wipes out the revenue gained from restoring the millionaires’ estate tax by eliminating the inheritance tax. As policymakers contemplate slashing public services and working families struggle to afford necessities, shoring up the state budget or expanding tax credits for working families would be better uses of these resources.