Maryland Governor Wes Moore has proposed a $1 billion tax increase package to address the state’s chronic budget deficits. The package includes changes to individual income taxes, the repeal of the inheritance tax, and modifications to excise taxes. While some of the changes are sound and align with the principles of simplicity, transparency, and neutrality, others could hurt Maryland’s competitiveness.
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, such as replacing the four lowest tax brackets with a single 4.7 percent rate, adding two additional brackets for top earners, and introducing a surtax on capital gains income for households earning more than $350,000 in federal adjusted gross income.
The proposal also eliminates itemized deductions and doubles the standard deduction. This is a step in the right direction and generally aligns with the principles of simplicity and transparency. However, the proposal does not address inflation adjustments for any of the income tax provisions. This could lead to unlegislated tax increases in future years.
One of the most problematic aspects of the proposal is the 1 percent surtax on capital gains. This surtax would negatively impact high earners, the group most mobile and responsive to tax increases. This could hurt Maryland’s competitiveness, especially given the wave of income tax reforms implemented in other states in recent years.
Other Tax Changes
The proposal also includes corporate income tax changes, such as decreasing the corporate income tax rate from 8.25 to 7.99 percent over two years starting in 2028. Additionally, the state would adopt water’s edge combined reporting, which is significantly less problematic than the worldwide combined reporting proposed in Maryland last year.
Another positive development is that the inheritance tax would be eliminated. This change would be paid for by lowering the estate tax exemption.
Several excise taxes would see higher rates under the proposal, specifically the sports wagering tax and the table game tax. These changes are projected to generate nearly $130 million for the state’s 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. These fees are an inefficient way of raising revenue, especially compared to alternatives like a very modest increase in the diesel tax.
Is the Proposal Sound?
While several proposed changes align with the principles of sound tax policy, the overall proposal will affect Maryland’s economic growth potential. And while any effort to raise $1 billion in taxes will have some impact on the economy, the administration passed on some options that would be less economically harmful. Sales taxes, which are entirely omitted from the proposal, are generally less damaging to economic growth than income taxes. Maryland’s sales tax rate of 6 percent is below the national average, and its sales tax base is relatively narrow. 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.