MD Democrats reach budget deal with new mix of spending cuts, taxes

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ANNAPOLIS — Gov. Wes Moore joined top Democrats in the legislature Thursday to announce that the parties had reached an agreement about the combination of spending cuts and tax increases to balance the budget amid a roughly $3.3 billion deficit.

The Democrats said that a number of specifics about the budget aren’t yet final, but among the new details they outlined in a news conference were plans for a 3% tax on information technology and data consulting services, at least $500 million in spending cuts and “reductions” on top of the nearly $2 billion the governor initially proposed, and agreement on a 2% capital gains surcharge on income exceeding $350,000.

The agreement also includes a 20% increase in the standard deduction, continuing to allow itemized deductions but limiting deductions for those earning more than $200,000, and new income tax rates for high earners, which aligns with the governor’s initial plan.

Single filers making at least $500,000 will be at a 6.25% tax rate, and those earning at least $1 million will be at 6.5%. The state’s highest rate is currently 5.75%.

Moore contended that the tax plan announced Thursday will result in 94% of Maryland taxpayers seeing a decrease or no change in their income taxes — a higher percentage than in his original plan.

“We’ve spoken to Marylanders at all income levels about this plan, and there’s consensus that if a person is making over $750,000 a year, it is reasonable to ask them to give roughly $1,800 more to help us invest in the success of our state,” Moore said during the news conference.

Democrats have also agreed to increase the tax on sports betting from 15% to 20%, increase the tax on cannabis sales from 9% to 12%, apply the 6% sales tax to vending machine purchases and repeal the tax exemption for sales of photos and artwork used in advertising.

Their plan increases the maximum local piggyback income tax rate that jurisdictions can adopt from 3.2% to 3.3%.

Senate Democrats and House Democrats had yet to agree on multiple transportation-related fee increases.

House appropriators, who have the first crack at the budget bill this year, voted Thursday to increase the vehicle excise tax from 6% to 6.8%, move up planned vehicle registration fee increases by one year, increase vehicle emission fees from $14 to $30, establish a 3.5% excise tax for short-term vehicle rentals and double vehicle titling fees.

The governor and the legislature’s presiding officers repeatedly cited the Trump administration’s “slash and burn” approach to governing, which has driven down revenue projections in Maryland by hundreds of millions of dollars, as a primary driver behind decisions to raise well over $1 billion in tax revenue.

“The cost we may bear to the Trump administration’s destruction is what I’ve been thinking about the most as we’ve had to make critical decisions,” Senate President Bill Ferguson said.

Ferguson claimed that Maryland relies on about a third of its economy to provide all sales tax revenue, appearing to bolster the argument for enacting a 3% tax on IT and data consulting services.

Republican lawmakers and some in the business community have raised concerns about the new tax hurting small businesses and providing a disincentive to businesses coming to Maryland, potentially running counter to the governor’s emphasis on bolstering businesses in the IT, cybersecurity and quantum computing space to drive growth in the state’s stagnant economy.

Mary Kane, the president and CEO of the Maryland Chamber of Commerce, said in a statement that the “Tech Tax” would undermine the administration’s push to be a tech hub, hurt small businesses and inhibit job growth.

“We understand the fiscal challenges, but Maryland’s long-term economic health depends on being business-friendly, not imposing new tax burdens that limit job growth,” she said in a statement.

Businesses have raised concerns about technology and IT companies facing direct taxation on their core services, increased costs for defense contractors hurting their competitiveness for federal contracts and particular harm to small businesses without in-house tech teams, according to the chamber.

During Thursday’s press conference, the Senate president framed the new tax on IT and data services as an alternative to enacting a broad increase of Maryland’s existing 6% sales tax rate.

“Instead of increasing Maryland’s sales tax rate to 7%, we are expanding it in a targeted way,” Ferguson said.

Some in the legislature have raised the question privately of whether Democrats are keeping a potential sales tax rate increase in their back pocket as a revenue option in the event that drastic federal cuts to vital programs like Medicaid force the state to take on hundreds of millions of more dollars in costs.

Republicans said Thursday that Democrats have balanced the budget on the backs of businesses and that their plans are sure to impede growth in the coming years.

Referencing Moore, Ferguson and House Speaker Adrienne Jones, Senate Minority Leader Steve Hershey said in a statement that “the market signals from this trio of state leaders are enough to ensure no businesses will look to grow or invest in Maryland.”

(This story has been updated.)