Maryland’s New Fiscal Year: Operating Budget and Tax Roundup 

Maryland’s new budget year (FY 2026), which began July 1, brings important changes for Maryland communities. The choices embedded in this year’s budget were driven by historically high deficit projections. Policymakers closed the short-term gap with a combination of budget cuts and new revenues, though significant challenges remain in future years. The General Assembly reduced but did not eliminate many of the most harmful cuts Gov. Moore proposed in January. 

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. 

The adopted budget eliminates the general fund shortfall for FY 2026 and reduces future expected shortfalls by about half. While this represents significant progress, formidable challenges remain, with $3 billion annual deficits expected by FY 2030. 

Tax Policy 

Positive tax reforms were a major contributor to this improvement, raising $1.3 billion per year in new general fund revenue, on average. While our tax system remains “upside-down” on the whole, the wealthiest 1% (with more than $700,000 in annual income) will no longer be the most lightly taxed income group in Maryland. 

Fair Tax Reform Highlights: 

• Reforms income tax code (+$351 million in FY 2026): State policymakers created 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). It also gradually phases out itemized deductions for high-income individuals and modestly cuts taxes for 59% of Maryland households through a 20% increase to the standard deduction. Only 4% of households will pay more. 

• Appropriately taxes income derived from wealth, not work (+$367 million): The tax reform package included  a new 2% tax on capital gains for those with annual income over $350,000. This asset-based income receives special treatment and a much lower tax rate under federal law. Taxing income derived from wealth is a step forward for racial justice. The adopted reform improved on the governor’s proposal by levying a higher tax rate and changing the measure from temporary to permanent. The revenue estimate includes $229 million in general fund revenue and $138 million directed to the Transportation Trust Fund. 

• Strengthens support for Maryland children (–$7 million): 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. 

Missed Opportunity: Closing Corporate Tax Loopholes 

Unfortunately, lawmakers stripped a proposed corporate tax reform from the governor’s proposal. This means that large corporations can continue to get out of paying their fair share by artificially shifting profits to other states or overseas. For the second year in a row, the House passed a provision closing this loophole by adopting a method of calculating the corporate income tax known as combined reporting. However, the Senate again rejected it. Notably, several influential senators voted to keep combined reporting in the budget companion bill, signaling that there is no consensus for maintaining the status quo. 

• Gov. Moore’s proposal to combine domestic (“water’s edge”) combined reporting with a small cut to the corporate tax rate would have raised $108 million once fully implemented in FY 2029. 

• The Fair Share for Maryland Act’s worldwide combined reporting measure could have raised $700 million or more per year. 

Other Tax Policy Choices 

• Data services tax (+$483 million): The adopted budget creates a 3% sales tax on certain data and IT services – a measure that was not in the governor’s proposal. While this measure is expected to raise much-needed revenue, it goes against experts’ advice to avoid applying sales taxes to business inputs and is likely to increase costs for working families. 

• Transportation revenue (+$500 million): The adopted budget raises hundreds of millions in new transportation revenue through a mix of taxes and fees. This includes $149 million from vehicle excise tax increases, $138 million from the capital gains surcharge (included in the revenue impact reported above), and $225 million in titling, inspection and other fees. 

• Smaller changes ($109 million): The adopted budget increases Maryland’s unusually low tax rate on adult-use cannabis from 9% to 12%, increases the state’s share of sports betting revenue, eliminates certain sales tax exemptions, and scales back the misguided Film Production Activity Tax Credit. 

Budget Cuts: Scaled Back but Still Harmful 

The adopted budget scales back some of the worst cuts in the governor’s January proposal but leaves in place an array of harmful service reductions. Here are some of the most notable examples. 

Public Schools 

Gov. Moore introduced a bill to implement deep, long-lasting cuts to public school funding, retreating from the promises embodied in the Blueprint for Maryland’s Future: 

• The governor’s proposed cuts totaled $143 million in FY 2026, growing to $817 million in FY 2030 (including cuts in the Budget Reconciliation and Financing Act). These add up to $2.5 billion in reduced funding over five years. 

• The governor’s plan reduced support for teacher collaborative planning time, students in low-income families, students learning English, schools serving the highest-poverty populations, and behavioral health services delivered in cooperation with the Maryland Department of Health. 

Lawmakers reined in the governor’s proposal significantly: 

• The adopted budget outright rejects cuts to support for students in low-income families, English learners, and high-poverty schools. 

• The budget reduces the cuts to collaborative time and mental health services and delays the collaborative time cuts by one year. 

• Compared to previous law, the adopted budget reduces school funding by $30 million this year, growing to $156 million by FY 2030. Cuts total $546 million over five years. 

• On the other hand, lawmakers broadened a “trigger” provision that would permanently reduce school funding (compared to current law) if revenues fall significantly short of expectations. 

• While the improvements in the adopted budget are encouraging, they make clear that our commitment to educating Maryland’s children is only as strong as the revenue we raise to support good schools. 

Disability Services 

Gov. Moore originally proposed $458 million in total cuts to the Developmental Disabilities Administration (DDA) for the new fiscal year, plus $160 million for the year that ended June 30 (FY 2025). This year’s proposed cuts included a $236 million reduction in state funding and $222 million in forfeited federal dollars. 

Fortunately, following intense advocacy by Marylanders with disabilities, lawmakers and the administration jointly restored 77% of the state funding for FY 2026 and 96% for FY 2025. These changes are likely to recover a similar portion of lost federal funds, as well: 

• Lawmakers rejected a proposal to eliminate the administration’s Low Intensity Support Services program. 

• Despite these improvements, Marylanders with disabilities and the people who deliver services will still be harmed by more limited cuts to the amount of needed services participants can use, as well as reduced payment rates for some providers. The adopted budget cuts $55 million in state funds (FY 2026) and likely forfeits a similar amount of federal aid. 

Child Care Scholarships 

For the second year in a row, Gov. Moore proposed freezing child care scholarship enrollment and imposing copays: 

• Maryland has significantly improved our child care scholarship system in recent years, ensuring that young children are in safe hands while likely boosting parents’ employment and earnings (especially for mothers). This proposal scales back the recent improvements. 

• Unlike last year, lawmakers allowed the proposed cuts to move forward, resulting in a $30 million decline in scholarships expected to be awarded compared to last year. 

• The Moore administration froze enrollment beginning in May. Initial waiting list data are expected in the program’s August quarterly report. 

What Comes Next 

Even after this session’s improvements, Maryland still faces multibillion-dollar shortfalls within a few years. Federal policy changes driven by the Trump administration and Republican legislation are likely to worsen these challenges. There are steps the General Assembly can take – some based on the Fair Share for Maryland Act – to 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 to avoid paying the corporate income tax and benefit from extra federal tax breaks. 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. 

• Eliminate ineffective subsidies: Lawmakers rejected Gov. Moore’s proposal to phase out the Enterprise Zones business subsidy program. The program eats up millions in much-needed revenue each year ($55 million combined state and local cost in FY 2021), and nonpartisan experts have repeatedly found that it does not work.