Budget agreement could generate more than $1 billion in new revenue

A compromise spending plan for the coming budget year includes more than $1 billion in tax increases, including a proposal to let local governments increase the maximum local piggyback tax rate.

The revenues were unveiled Thursday by the governor and legislative leaders as part of a broad budget “framework” that will guide negotiators in the next few weeks, as they rush toward the end of the session.

The new revenues, coupled with an estimated $2.5 billion in budget cuts, are designed to cover a projected $3 billion deficit in the fiscal 2026 budget, and leave a reserve for fiscal 2027. The budget will also include “federal government spending triggers” that would activate in response to likely federal budget cuts.

“It ensures that those who rely on federal benefits are informed, prepared and can advocate for their continued access to essential service regardless of what happens at the federal level,” Senate President Bill Ferguson (D-Baltimore City) said.

Topping the list of new taxes unveiled Thursday is nearly $500 million from a 3% sales tax on data and IT services, according to budget documents shared with Maryland Matters. The tax, originally proposed as a business-to-business tax, would apply to anyone who uses such a service.

While the new proposal will have consumers pay the tax, too, the service on which the tax will be applied is smaller than the original proposal. Ferguson called it a modernization of the state tax code at a time when Maryland’s economy has become more service-based.

Tasha Cornish, executive director of the Cybersecurity Association Inc., said the tax has “harsh consequences for the state’s security” as well as Maryland’s ability to compete.

“We are sympathetic to the fiscal pressure exerted on lawmakers, but this tax is an unwise move,” Cornish said. “Maryland risks losing its competitive edge in cybersecurity, forcing companies to relocate and taking high-paying jobs with them. It’s a short-sighted attempt to gain revenue at the cost of our security and future economic stability.”

Another $367 million would come from a 2% surcharge on capital gains income over $350,000. The rate is double what Moore proposed in his budget.  Most of the tax would land in the state’s general fund, with about 40% earmarked for the state’s Transportation Trust Fund.

The state would also raise $344 million from changes in the tax code, including the creation of two new tax brackets: Those earning $500,000 to $1 million would pay 6.25%; those above $1 million in earnings would pay a rate of 6.5%.

“We are asking those who have done exceptionally well to pay slightly more so we can have the best schools in the country, so we can support law enforcement and our firefighters, so we can make sure we are growing our economy.,” the governor said.

Moore said the “refinement”of his tax plan ensures “we hit our goal of delivering tax relief to the middle class.”

He told reporters that 94% of Marylanders will see a reduction in their taxes or no increase. But when asked how many would see a reduction and the size of the average reduction, Moore could not provide specifics.

Moore, in his budget, had also proposed doubling the standard deduction, but the framework unveiled Thursday called for a 20% standard deduction increase.

The compromise agreement also increases the maximum piggyback income tax rate for local governments to 3.3%. The current maximum is 3.2%.

The agreement also ruled out a number of potential tax changes;

• No increase in the state’s 6% sales tax on goods.
• No 75-cents fee on each retail delivery.
• No property tax increase.
• No expansion of gambling into iGaming.
• No estate tax increase.
• No changes to the car trade-in allowance.
• No taxes on snacks or sugary drinks.
• No increase in the gas tax.

The framework was roundly criticized by Republicans.

 

House Minority Leader Jason C. Buckel (R-Allegany) said “the lack of clarity and mushy talk was disappointing.”

“I expected someone to come out and say this is what the total revenue package is,” said Buckel.

Republicans make up about 30% of the House and Senate. They said Thursday’s announcement was the first time they heard how the spending plan would be altered.

“The word framework was used a lot more often than details, and that’s our biggest question,” said Senate Minority Leader Stephen S. Hershey Jr. (R-Upper Shore). “How are they going to get to the cuts that they talk about?”

Hershey also questioned Democrats’ plan to impose a 3% sales tax on data and IT services at a time when Moore has said he wants to attract “IT and cyber and AI” to  the state.

“I don’t understand why those companies would end up coming to Maryland,” Hershey said. “That’s one of the biggest things we’ve talked about from day one, is that’s who he’s trying to attract, and yet he’s going to put a first-in-the-country tax on those types of services. We just don’t think that’s the way to go if you want to grow the economy, and for businesses here in Maryland.”

On Thursday afternoon, the House Appropriations Committee also approved a plan to implement combined corporate tax reporting. Moore had proposed phasing the reporting in by 2028, then cutting the corporate tax rate from 8.25% to 7.99%.

Appropriations kept the language implementing combined reporting but nixed the corporate tax rate reduction. The change faces tough sledding in the Senate.

Some of the changes proposed, include the addition of combined reporting, tracked with legislation backed by advocates for passing much more aggressive tax reforms.

“Marylanders value and deserve good schools, transportation, health care, and other essential services,” according to a statement released by Fair Share Maryland. “As our communities are being harmed by indiscriminate federal layoffs and threatened cuts to grants and programs, our state level services are more important than ever. Having sustainable, fair sources of revenue is essential to help us get there.”

The agreement makes other changes including:

• Adding the state’s 6% sales tax to vending machine purchases.
• Repealing the exemption for sales of photographic and artistic material used in advertising.
• Repealing an exemption for sales of coins and bullion over $1,000 . The change leaves an exemption for sales made specifically at the Baltimore City Convention Center.
• Increasing the tax rate on sports wagering from 15% to 20%. The change will bring in $32 million in new revenue.
• The cannabis tax rate will jump from 9% to 12%, raising $39 million.

The House plan also calls for additional money for state transportation. It would:

• Increase the excise tax on vehicle sales from 6% to 6.8%. The change would raise $158 million.
• Raise $51 million by accelerating the implementation of vehicle registration fee increases passed last year.
• Increase vehicle emission fees from $14 to $30. That change would raise $20 million.
• The package would also raise another $9 million by changing the definition of vehicles eligible for historic tags by defining eligible cars as vehicles older than model year 1999. The current definition of an older car is any car 20 years old.
• Raise $47 million by imposing a 3.5% tax rate on short-term rentals.
• Doubles titling fees on new and used cars to $200, raising $80 million.

The Senate has yet to sign off on the transportation-related proposals. The House and Senate have agreed to a roughly $400 million package for transportation. The two chambers differ on the specifics of reaching that number but are expected to come to an agreement before the session ends on April 7.

The House could have the budget on the floor for a preliminary vote early next week. A final vote could come soon after. The Senate could complete work on the budget within a week after and send differences quickly to a conference committee.

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by Bryan P. Sears, Maryland Matters
March 20, 2025

Maryland Matters is part of States Newsroom, a nonprofit news network supported by grants and a coalition of donors as a 501c(3) public charity. Maryland Matters maintains editorial independence. Contact Editor Steve Crane for questions: [email protected].