As Governor Wes Moore grapples with a projected $3 billion budget deficit in fiscal year 2026, he has put forth a bold budget proposal that includes around $1 billion in proposed tax increases to bridge the gap. While some elements of the package align with principles of simplicity, transparency, and neutrality, there are concerns about the potential impact on Maryland’s competitiveness, especially in light of recent income tax reforms in other states.
Individual Income Tax Changes
The cornerstone of Moore’s proposal is the overhaul of individual income tax provisions. Key changes include consolidating the four lowest tax brackets into one, introducing two new brackets for top earners, applying a 1 percent surtax on capital gains income for high-income households, and modifying standard and itemized deductions and tax credits. While these changes are projected to generate significant revenue for the state, concerns remain about the impact on taxpayers, particularly high earners.
Among the proposed modifications, the consolidation of tax brackets, increase in the top marginal tax rate, and elimination of the inheritance tax are notable. However, the introduction of a capital gains surtax raises concerns about Maryland’s competitiveness, as it could potentially drive high earners to relocate to other states with more favorable tax environments. Furthermore, the disparity in standard deductions between Maryland, Virginia, and DC raises questions about the state’s ability to attract and retain residents.
Regarding inflation adjustments, there is a notable absence in Moore’s proposal, which could lead to unintended tax burdens in the future. Addressing this issue by annually adjusting tax brackets and deductions for inflation is crucial to prevent taxpayers from facing higher taxes as a result of bracket creep.
Other Tax Changes
In addition to individual income tax reforms, Moore’s proposal includes changes to corporate income taxes, estate taxes, and excise taxes. While some aspects, such as the elimination of the inheritance tax and adjustments to excise taxes, are positive developments, concerns linger about the long-term impact on Maryland’s economic growth potential.
Modifications to the corporate income tax rate, adoption of water’s edge combined reporting, and elimination of the inheritance tax highlight the administration’s efforts to streamline tax policies. However, the proposed increases in excise taxes, particularly on sports wagering, table games, and cannabis, may pose challenges for businesses and consumers alike. Additionally, the imposition of a delivery tax raises questions about the efficiency of revenue-raising measures and potential compliance costs.
Conclusion
In conclusion, Governor Moore’s tax proposal presents a mix of positive reforms and potential drawbacks for Maryland’s economy. While efforts to generate much-needed revenue are necessary, the administration may need to reconsider certain aspects of the plan to minimize negative impacts on taxpayers and businesses. Exploring alternatives, such as expanding the sales tax base or modestly increasing the rate, could offer a more balanced approach to addressing the state’s budget deficit without compromising its economic growth potential. As discussions around the proposal continue, stakeholders must engage in constructive dialogue to ensure that any tax changes implemented benefit Maryland residents in the long run.
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