Maryland Should Ditch Unbalanced HR 1 Tax Breaks to Protect Public Services

The Moore Administration made their case to lawmakers on the funding cuts and revenue adjustments included in the Budget Reconciliation and Financing Act (BRFA) last week, which means that Maryland’s budget debate for the 2027 fiscal year has begun in earnest. The governor should be commended for proposing limited measures to reduce the fiscal damage from President Trump’s 2025 megabill (H.R. 1), but lawmakers should more comprehensively reject the law’s lopsided tax spillovers and protect public services.

Four key factors are shaping this year’s budget debate:

• Maryland is facing daunting fiscal headwinds. While Gov. Moore’s proposal satisfies Maryland’s constitutional balance requirement for the coming fiscal year, analysts project a $2.6 billion cash shortfall in the state’s general fund in FY 2028, growing to $4.5 billion by FY 2031. Ongoing revenues are expected to cover only 89% of projected expenditures by the end of the five-year window.
• Last year’s federal megabill (H.R. 1) is an important contributor to these challenges. Absent legislative action, the law is projected to cost the state $588 million over the next five years (general fund), due to both federal cost shifts and tax policy spillovers.
• H.R. 1 hits Maryland with a double-whammy: in addition to these fiscal impacts, the law is expected to take health coverage and nutrition assistance away from thousands of Marylanders, while handing massive federal tax cuts to big businesses and wealthy individuals. Even after the positive reforms the General Assembly passed last year, the wealthiest 1% pay $36,000 less in combined federal, state, and local taxes today than they did a year ago, on average.
• Moore and legislative leadership have unanimously closed the door on comprehensive fair tax reforms this year, despite the documented popularity of these measures.

As a result, measures to decouple Maryland from the megabill’s tax policy impacts are among the only options currently on the table to protect services like education, child care, and health care from severe budget cuts next year.

Why Federal Tax Law Changes Affect Maryland Policies

Like most states, Maryland’s tax code heavily borrows definitions and legal concepts from federal law, a practice known as conformity.

This approach has advantages – there is no need to reinvent the wheel when federal frameworks are already available, and using information Marylanders have already provided on their federal tax forms eases administration for families as well as the state comptroller’s office.

However, this system is more challenging when Congress changes federal tax law, as it did last year and in 2017. As federal changes flow into the state tax code, they can cause significant revenue impacts in either direction. State policymakers must then decide whether to maintain conformity to federal law by doing nothing or pass legislation to decouple. While Maryland has a smart measure to automatically delay conformity with revenue-losing changes, legislative action is required to prevent future losses.

Limited Decoupling in Governor’s Budget

Commendably, Gov. Moore’s budget proposal rejects two important tax spillovers from H.R. 1 via the Budget Reconciliation and Financing Act (or BRFA; SB 284):

• Qualified production property ($151 million in FY 2027):R. 1 allows businesses to deduct the full cost of real estate purchases for certain manufacturing purposes up front, rather than over time as under conventional accounting rules.
• Bonus depreciation (partial decoupling: $13 million in FY 2027): This provision allows companies to deduct the cost of certain investments such as equipment and software purchases on an accelerated schedule – in some cases all at once – rather than over the lifetime of the investment as called for under conventional accounting rules.

Together, these measures save $164 million in averted state revenue loss in FY 2027 (general fund: $133 million), and $540 million cumulatively by FY 2031. For comparison, this is more than the state spends on aid to local health departments ($115 million in FY 2027 under the governor’s proposal).

At the same time, Gov. Moore has highlighted more than $100 million worth of tax breaks in President Trump’s signature law that he is choosing to conform to. These actions are unlikely to lead to economic growth. Research shows that taxes are not among the most important factors businesses consider when deciding where to locate, and nonpartisan state analysts have repeatedly found that Maryland’s array of existing business tax breaks do not effectively boost the economy (again and again and again and again and again and again and again and again).

Lawmakers Should Build on the Governor’s Proposals

As the state faces the prospect of deep cuts to services like education, child care, and health care, lawmakers should reject more of the automatic, unbalanced state tax cuts created, expanded, or extended under H.R. 1. The recommendations below include provisions from several bills introduced in the House of Delegates, plus one option highlighted in the DLS Fiscal Briefing. Lawmakers could adopt these bills or add decoupling provisions to the BRFA via amendment.

Adopting all of the following measures would save $396 million in averted state revenue loss in FY 2027 (general fund: $343 million) and likely more than $1.6 billion cumulatively over five years. For comparison, this is more than the state puts toward the Department of Housing and Community Development ($314 million state funds in FY 2027 under the governor’s proposed budget).

• Business tax breaks (about $245 million in FY 2027):
  • Foreign-derived deduction-eligible income (FDDEI) is a tax break on profits from intellectual property produced in the United States and sold abroad. This tax break would not promote in-state production, and primarily benefits tech giants like Alphabet (Google), Meta (Facebook), and Amazon. See HB 1080.
  • Maryland should decouple from the accelerated expensing of research and experimental (R&E) expenditures under H.R. 1. Conforming to this tax break doubles down on existing state tax subsidies DLS has found to be ineffective and recommended discontinuing. Lawmakers should add this provision to the BRFA via amendment.
  • Business interest deduction: H.R. 1 weakens one of the few revenue-raising provisions of the 2017 Trump tax law by increasing limits on the amount of interest costs businesses can deduct. Maryland should maintain the 2017 limits. See HB 880.
  • The so-called “Qualified Small Business Stock” (QSBS) deduction zeroes out taxes on capital gains from certain early-stage corporate investments and mainly benefits wealthy venture capitalists. This tax break was already ballooning in cost even before H.R. 1 expanded it, and overwhelmingly benefits households with over $1 million in annual income. See HB 801.
  • Opportunity Zones: While the “Opportunity Zone” program’s stated purpose is to encourage economic development in struggling areas, it functions by deferring and in many cases eliminating investors’ capital gains income, among the most concentrated categories of income along lines of income, wealth, and race and ethnicity. Multiple empirical analyses have found that Opportunity Zone subsidies have had small or nonexistent impacts in the areas they are ostensibly intended to benefit. House Bill 1080 prohibits designation of new Opportunity Zones in Maryland and decouples from expanded tax deductions for certain Opportunity Zone investments.
  • Other business tax breaks: A handful of other decoupling measures would individually have modest impacts, but every million counts in the current fiscal environment. These include full decoupling from H.R. 1 bonus depreciation (HB 801), another revenue-losing delayed payment tax break (§179 expensing; HB 1080), and a deduction for banks and other lenders that receive interest income from certain rural and agricultural property loans (HB 1080).
• State and local tax (SALT) deduction (about $150 million per year): H.R. 1 temporarily increases the cap on state and local tax deductions from $10,000 to $40,000, with a phase-down at high incomes. While there are reasonable arguments for and against the federal SALT deduction, the favorable case is much weaker at the state level – and we certainly don’t need a costly expansion to the deduction. Because the higher cap is officially temporary, this measure would theoretically have no fiscal impact beginning in FY 2031. In reality, decoupling would provide permanent protection in case Congress extends the higher cap or increases it further. House Bill 926 is intended to maintain the $10,000 SALT cap. Due to a drafting error, the bill requires amendment and the fiscal note is inaccurate. Based on information in the Bureau of Revenue Estimates’ 2025 60 Day Report, MDCEP estimates that maintaining the $10,000 cap would likely save approximately $150 million per year.
• Reject school privatization tax breaks: H.R. 1 creates a new special mechanism for households to essentially redirect federal dollars to private school tuition funds, at no cost to themselves, in addition to continuing the 2017 law’s provision making private K-12 schools eligible for tax-advantaged “529” college saving funds. House Bill 930 opts Maryland out of both private school tax breaks and preserves state and federal resources for public schools. There is no revenue estimate for this measure.

Decoupling Would Support Local Governments

Maryland’s local governments are also facing significant fiscal pressures, and decoupling from state tax impacts of H.R. 1 would provide them a measure of relief.

• Moore’s decoupling measures would save local governments $30 million in averted revenue loss in FY 2027, including about $5 million in transportation revenues transferred from the state (highway user revenues). By FY 2031, the governor’s proposals would save local governments a cumulative $96 million (including $12 million counted in the state impacts).
• The decoupling measures recommended here would likely save local governments tens of millions each year:
  • Maintaining the current $10,000 cap on state and local tax deductions would likely save local governments tens of millions per year, but there is not currently an estimate of this impact.
  • A portion of the transportation revenues from decoupling from accelerated research and experimental expensing and the FDDEI deduction would be distributed to local governments as highway user revenues, likely on the order of $5 million to $10 million cumulatively by FY 2031.
  • Other measures proposed here would cumulatively save local governments at least $87 million cumulatively by FY 2031, but this is only a fraction of the likely impact.

Maryland Can’t Decouple from Global Economic Risks

When lawmakers convene again in 2027, they will be constitutionally required to close a projected $2.6 billion general fund cash deficit. The sooner we take action, the easier it will be to protect essential state services.

The math is straightforward: to close the shortfall, policymakers realistically have three options:

• Raise significant new revenue by closing corporate tax loopholes, asking more of the wealthiest individuals, or other measures.
• Slash public services Marylanders rely on, from education, to health care, child care, and beyond.
• Draw down on savings such as the state’s rainy day fund. During a recession, using savings protects public services, limits job losses, and supports spending at local businesses – that is what the rainy day fund is there for. However, drawing down savings to fill the kind of long-term gap Maryland faces today only delays the problem, and risks leaving less of a cushion for when it is needed.

Some often gesture toward a fourth option: supercharge Maryland’s economic growth. Especially in the short term, this is easier said than done.

The state has policy levers to support healthy growth in the long term, like investing in the schools that train tomorrow’s skilled workforce and maintaining reliable transportation infrastructure. These measures cost money, which means they require sufficient tax revenue. They also tend to bear fruit over years and decades, not fast enough to close gaps that are just around the corner.

In the short term, economic development plans often focus on luring business investment with special tax breaks and grants, such as this year’s promised tens of millions for drug manufacturer AstraZeneca and The Sphere entertainment venue. As noted above, nonpartisan analysts have repeatedly found that this approach is ineffective. The result: efforts to grow our way to balance instead make our fiscal challenges worse.

Finally, Maryland’s economy is not an island. Thousands of federal layoffs, state aid cuts, chaotic tariff policies, armed agents menacing main streets and downtowns, and fallout from President Trump’s Iran war all pose serious risks to our economy, on top of the ever-present vicissitudes of the global business cycle. There is no development strategy that will protect us from a national or worldwide recession. But raising sufficient revenue – without delay – can cushion the impact on public services we all rely on.