Budget Deal Leaves Education Funding, State Services Deeply Uncertain

The budget deal lawmakers reached last week made some progress on funding transportation needs, but left considerable uncertainty about the state’s ability to fund education, child care, and other essential services in coming years. Ongoing general fund revenues are currently projected to fall $1.7 billion short of the state’s budget needs in FY 2026, increasing to nearly $3.3 billion by FY 2028. Deep cuts to the building blocks of strong Maryland communities will become unavoidable if Gov. Moore and the General Assembly do not act decisively to raise new revenue next year.

This year’s legislative session opened with dual budget challenges:

• First, the state faced nearly $3 billion per year in projected structural deficits by the end of the five-year budget forecast window, driven by the lack of sufficient new revenue to support the Blueprint for Maryland’s Future school funding reform. The Board of Revenue Estimates’ downward revision slightly worsened this outlook in March.
• Second, fuel taxes and other dedicated transportation revenue sources were forecast to fall $3 billion short of the state’s needs over a six-year planning window.

This mismatch between projected revenues and budget needs set up a stark choice: Improve Maryland’s tax code to raise significant new revenue, or make deep cuts to education, transportation, and other building blocks of thriving communities.

Gov. Moore’s budget proposal balanced the books in the short term mostly through one-time maneuvers like drawing down savings. But it also took initial steps down the path of austerity by permanently rolling back recent improvements to community college funding and opening the door to child care scholarship waiting lists and higher copays. The legislature ultimately rejected the proposed changes to the child care sponsorship program for the next budget year.

Missed Opportunity

The Fair Share for Maryland Act offered a path forward. The bill would have raised $1.6 billion per year once fully phased in by closing corporate tax loopholes and asking more of the wealthiest individuals, all while cutting taxes for more than 1 million Marylanders and alleviating child poverty. The House of Delegates included a major element from the Fair Share Act in its budget plan, alongside several tax and fee increases meant to support transportation infrastructure.

However, Senate leadership ardently opposed the corporate tax reforms included in the House proposal. While the adopted budget makes meaningful progress on transportation revenues, lawmakers ultimately did very little to shore up resources for public schools and other vital services. The budget deal raises about $80 million per year by increasing tobacco taxes, and shifts funds from other sources to designate an additional $192 million in existing revenue to education. While the new tobacco revenue is a step in the right direction for meeting students’ needs, it falls far short of the amount needed to meet Marylanders’ long-term needs, and does nothing to balance our upside-down tax code.

Governor, Lawmakers Must Act Next Year

While the expected general fund structural shortfall (the shortfall in ongoing revenues compared to ongoing expenditures) for the coming budget year is a manageable $483 million, it is projected to more than triple in FY 2026 and exceed $3 billion per year by FY 2028.

Because the state constitutionally must balance its budget each year, this leaves policymakers with few options. If we wish to keep our promises to Maryland children and support other services like child care that support a strong Maryland economy, Gov. Moore and the General Assembly must act next year to raise significant new revenue. Closing corporate tax loopholes and asking more of wealthiest individuals is the best way to do this while building broadly and equitably shared prosperity.

Failing to act would have wide-ranging implications for all Marylanders:

• Without new revenue, it will be impossible to keep the promise of the Blueprint for Maryland’s Future. Lawmakers, subject matter experts, and diverse stakeholders spent years designing this historic plan to strengthen Maryland’s public schools, but the new investments in the Blueprint will disappear if there is no money to pay for them.
• Moore’s budget proposal called for permanent cuts to community colleges, restrictions on child care assistance, and reductions to environmental and agricultural investments. While lawmakers rejected some of these cuts and reduced others, cuts like these will become unavoidable if we continue on the current path.
• Policymakers slashed funding for local health departments in the aftermath of the Great Recession and waited years to start rebuilding. This choice likely hampered Maryland’s response to the COVID-19 pandemic, and repeating it would put us in a worse position to respond to another public health crisis.
• Staffing cuts in the years following the Great Recession left state agencies unable to do their jobs, and inadequate pay made it hard to even fill open positions. Results included dangerous conditions at state prisons and massive customer service failures in our unemployment insurance system. While Gov. Moore has made progress in rebuilding our state government, these improvements will prove unsustainable without new revenue.

Commonly Asked Questions About State Revenue

Why can’t we wait?

While projected multibillion-dollar general fund deficits are still a few years out, policymakers would be unwise to wait before acting to raise revenue.

Like many state agencies, the Comptroller’s Office has in recent years been hampered by insufficient staffing and outdated technology. As a result of these inadequate resources, it is expected that the comptroller will require several years to implement any major tax changes and begin collecting revenue. The Fair Share Act’s implementation timeline is designed to begin raising revenue in the years deficits are projected to grow most rapidly while allowing time for effective administration.

If lawmakers wait to act until 2026 or later, deep funding cuts will become unavoidable before tax reforms can start generating significant revenue. To safeguard the promises policymakers have already made to the people of Maryland, the time to act is now.

Are taxes the only option?

The math is straightforward: Policymakers can meet the state’s constitutional balanced budget requirement either through deep funding cuts or by raising significant new revenue. Any realistic plan to balance the books in coming years must contend with this fact:

• There are certainly steps policymakers can take to strengthen Maryland’s economy – most of which, like expanding child care access, updating transportation infrastructure, or strengthening our workforce, would require additional public investments. But on their own, none of these can generate nearly enough growth to close projected deficits over the next several years.
• Calls from corporate lobbyists and their allies to cut taxes or roll back worker protections are false promises. The experiences of other states show that this approach would worsen the budget outlook and make Maryland a worse place to live and work, with no compensating boost to economic growth.

How does tax policy affect the economy?

Raising sufficient revenue is essential for Maryland’s current and future economic strength. When surveyed about their priorities when choosing where to locate, business leaders focus on assets that depend on public investments:

• They want to be near skilled workers, who come from Maryland’s public schools, colleges, and universities.
• They want to be near reliable transportation, which is sustained with publicly funded maintenance, repairs, and expansions.
• They want to attract workers with a high quality of life, made possible by parks, libraries, and other amenities our shared resources support.

Child care has emerged as an especially crucial economic factor in recent years. The Office of the Comptroller’s 2023 “State of the Economy” report found that rising child care costs are one of the most significant factors preventing women from rejoining the traditional labor force and that Maryland has seen a greater decline in the number of women working or actively seeking work than the national average. Protecting and expanding state support for child care is essential to ensure businesses can hire the workers they need.

In comparison, taxes are much less important when businesses decide where to locate. In surveys of business leaders, corporate tax rates reliably rank lower in importance than factors like skilled workers, highway access, and quality of life that depend on public investment. While shareholders and executives may prefer lower taxes in isolation, the investments those taxes pay for are ultimately more important to making Maryland an attractive place to do business.

Moreover, Maryland’s tax code is currently highly favorable to business. According to an annual report prepared by the global accounting and consulting firm EY for the anti-tax Council on State Taxation:

• State and local business taxes are a smaller share of private-sector economic output in Maryland than in 33 out of 50 states, including all of Maryland’s neighbors, plus the District of Columbia.
• Business is a smaller contributor to Maryland’s tax mix than in any other state.
• Maryland is tied with Utah for the most public investments benefiting business per dollar paid in taxes, nationwide.

Closing corporate tax loopholes would put Maryland in good company. Today, 28 states plus the District of Columbia use combined reporting – a diverse group that includes Alaska, California, Kentucky, Massachusetts, and West Virginia. Because it is so common, the large majority of major corporations in Maryland already operate in at least one combined reporting state.

Likewise, strong evidence from credible research as well as from other states’ experience tells us that asking the wealthiest individuals to contribute to the services we all rely on is consistent with a vibrant economy:

• The bulk of empirical research finds little link between state tax policy and where people want to live. This is consistent with common sense: For most of us, factors like good jobs, affordable housing, great schools, pleasant weather, and being close to relatives are far more important than tax rates.
• Careful research shows that wealthy individuals relocate less often than other families, and that taxes aren’t an economically important driver of where they settle down. This, too, is little surprise: Uprooting your life to reduce your tax responsibilities may not be an attractive option if you have invested time and money in a good job, a business, or a comfortable home, or if you are embedded in your community’s civic life.
• An analysis by the Institute on Taxation and Economic Policy compared the economic performance of the nine states with the highest statutory income tax rates to the nine states that do not levy a personal income tax. This analysis found that from 2006 to 2016, the states with high statutory income tax rates saw faster per-capita growth than the no-income tax states in GDP, personal income, disposable personal income, personal consumption, and prime-age employment.