Budget deficit, energy and tax issues loom over MD economy

Discussing the economic strengths and weaknesses of Maryland can be an interesting affair.

On one hand, the state offers numerous natural gifts: a diverse landscape, an educated workforce and a central location in the middle of the Atlantic seaboard ― plus sharing a border with Washington, D.C.

Still, like any location that dots the economic development spectrum, Maryland has issues, notably a $1.5 billion budget deficit that could double and concerns about high taxes on its residents and businesses, as well as the need for a stronger workforce.

Of late, with the federal downsizing, tariffs and uncertainty that came after the 2025 presidential election, many members of the business community are concerned about Maryland getting closer to reaching its full economic potential.

Issues new, old

Any national buzz about Maryland usually concerns its great assets, as well as numerous challenges. Dennis Donovan, a principal with Wadley Donovan Gutshaw Consulting in Bridgewater, New Jersey, was quick to point to its “powerful set of locational resources to support expansion and attraction of companies across varied industries.

“Among its most compelling assets are logistics,” e.g., its central location in the Eastern U.S., with robust freight, aviation, supply chain service providers and highway linkage; as well as its “high quality/well educated workforce; renowned higher education offerings; vibrant ecosystems in industries such as aerospace/defense, life sciences, financial services, food processing, metalworking, robotics and packaging; and industrial sites that are ready for immediate occupancy.

“In addition,” said Donovan, “the state’s 23 counties, with Baltimore City, offer a diverse set of locational attributes to accommodate a wide array of industries.

“But, as with all states,” he said, “there are drawbacks.”

Those drawbacks include labor shortages in select fields (such as skilled trades), modestly higher operating costs compared to various states outside the mid-Atlantic, a comparatively high corporate tax burden, recent passage of the tech tax, consistently low business climate rankings, an energy grid in need of upgrades, in-state electric power generation capacity, and in many smaller counties, a paucity of modern available buildings.

Similar observations and more were offered by Anirban Basu, CEO of the Baltimore-based Sage Policy Group, who said that “Maryland has many profound strengths. However, presently, many of those are not translating into growth.”

For instance, Maryland “is a leader in institutional research and development, but that is not currently translating into growth because of the impact of Trump administration policies on [reducing] research budgets,” said Basu, “as well as Maryland’s historic inability to translate R&D into commercial success.”

He said that those new challenges often dovetail into its longstanding issues. “Maryland has been very poorly operated from the perspective of budget management. This is not only observable in structural fiscal shortfalls, but in a series of audits that indicate that operational and fiscal management are lacking.”

Basu continued. “Obviously, Maryland’s inability to compete for private investment is also a challenge. Taxes are too high and housing too expensive,” he said, adding that there “was a time when the state could still prosper, even with a lousy business climate, as the federal government funneled money into Maryland.

“But for now,” he said, “that engine of growth is sputtering, which means that Maryland is looking at some very difficult years ahead.

“The dearth of imports entering America has also negatively impacted the Port of Baltimore, as has the collapse of the Key Bridge,” said Basu, noting the Maryland Transportation Authority’s updated estimated cost to build the new Key Bridge is to be between $4.3 and $5.2 billion, with an anticipated open-to-traffic date in late 2030.

As for the big picture, he doesn’t think the legislature will work during the upcoming session to make it more attractive to do business in Maryland.

“The legislature continues to lack a basic understanding of how to support a business community and how important it is for that community to flourish,” Basu said. “Watch for a wave of anti-business legislation to emerge during the next General Assembly, including calls to dramatically increase [to $25 an hour] an already elevated state minimum wage.”

No new taxes?

While Maryland is often cited for having high tax rates, Daraius Irani, vice president, business and public engagement at Towson University, thinks there won’t be any tax hikes in 2026 for a simple reason. “It’s an election year,” he said.

However, with Gov. Wes Moore dealing with budget constraints, Irani said, “there probably will be some cuts to services as he tries to balance the budget. But I also think he understands the need to offer a more welcoming business environment, as well as having businesses stay headquartered in Maryland.”

The way to make that happen, he said, would be for Moore to streamline the approval process. “It takes too long here. Making the process easier to navigate sends a signal that it’s OK to start a business here.”

As for how the policies of the new administration have affected Maryland, “Every one of the federal policies have touched Maryland in a negative way,” he said, “including ‘Eds (education), beds (tourism), meds (health care) and feds (federal government), as well as the Port of Baltimore.”

As for the federal government, Irani thinks having the current turmoil in the rear view mirror “will help, but there is still uncertainty regarding the tariffs. People don’t know how much they will be, what industries they’ll affect,” etc.

He offered this overview: “We mainly import intermediate goods, such as components and raw materials that go into final products,” he said. “Some use imported steel, for instance, since it’s not available in the grade and volume needed.

“What we’ll probably start seeing in 2026 are the full effects of the tariffs, depending on what President Trump wants to place a tariff on,” said Irani. But the key word in that sentence is “probably.

“That’s an ad hoc way of setting tariff policy,” said Irani. “He’s already pulled back on food tariffs. If you’re a business owner and make a decision, you may have bought something one day, only to find that the tariff may be gone on that item the next and that you could have saved money. But given his way of changing his mind, we don’t know what to expect.”

Rate cuts

Todd Feuerman, director at Baltimore-based Ellin & Tucker, was measured when contemplating what lies ahead. “The results for 2025 were good for companies across many different sectors in Maryland, notably construction, technology and professional services,” he said, “as opposed to 2022 and 2023, which were strong across the board for many industries.”

Concerning 2026, Feuerman expressed “cautious optimism,” but with caveats. “Maryland has been greatly affected by the federal shutdown, based on our proximity to Washington and because we have so many federal contractors based here” or with a large presence in the area.

However, he feels that with the initial shock past, “the faucet should be turned back on,” and the effects of the shutdown should lessen as the economy moves forward. Feuerman also pointed to another possible reduction in interest rates. “The Federal Reserve Board could soon reduce interest rates for the third time since September, which I think it will, after the stock market flux in mid-November.”

So should that happen, Feuerman thinks some financial avenues will reopen, thus boosting the economy. “If interest rates to drop again,” said Feuerman, “that should kick-start more projects, and move businesses to purchase equipment and improve their facilities.”

But he, too, also noted the other issues that have long affected Maryland’s uneven business landscape.

“From a negative standpoint, the tax rate in Maryland is still high, ranging from about 8% to 10%, which is one of the highest in the country,” said Feuerman. “That continues to cloud Maryland’s reputation within national business circles. Being next to Virginia, a friendlier state, can make that challenge even harder to address.”

The other challenge is also faced by many other states: the labor shortage. “That problem affects not only professional areas like accounting and legal services, but also various construction and manufacturing trades, among others, in blue-collar industries.”

‘Lighthouse’ industry

While there are concerns about Maryland’s economy, some observers discussed strengths, including Mary Kane, CEO of the Maryland Chamber of Commerce. Kane said state leadership “is increasingly acknowledging the need to prioritize private-sector growth, job creation and economic diversification beyond federal employment.”

Others interpret recent events as simply part of the business cycle, such as Brian Ippolito, CEO with Contiem, a content management company in Annapolis. “Despite the government shutdown, Maryland continues to assert its dominance over the federal and government business markets. We have a highly skilled, resilient workforce,” he said, “and can work through any dip in the market.”

Tammi Thomas concurred. Noting Maryland as “being among the U.S. leaders in innovation,” Thomas, president for the Maryland Economic Development Association and chief development and marketing officer for TEDCO, cited a high-profile industry and a huge state success story.

“We’re headquarters to IonQ, the first word’s first quantum computing company to go public with an IPO of $1 billion,” said Thomas. “It’s a $10 billion company that came out of the University of Maryland College Park, which proves that we have the right talent and R&D capabilities for companies to grow here while they grow worldwide. That gives us a competitive advantage.”

And that innovation, she said, “is due to the university and the state’s brainpower.” Thomas went on to cite Maryland as No. 1 in emerging venture capital investment, according to Site Selection Magazine, and the No. 2 best-educated state, according to WalletHub, while also noting that UMD ranked among the top universities for entrepreneurship studies, according to the Princeton Review.

Gov. Wes Moore has referred to technology as one of Maryland’s ‘lighthouse’ industries that can lead the state back to financial balance, though he also supported the addition of Maryland’s tech tax during the last session. So can that sector still flourish?

Kelly Schulz thinks so. “Despite some policy headwinds, the technology and life sciences industries will continue to light the path forward for Maryland’s economy,” said the CEO of the Maryland Tech Council.

“We’re seeing highly innovative companies move their talent and operations here,” said Schulz, pointing out that Korea-based Nature Cell is opening a bio manufacturing facility in Baltimore, creating 500 jobs; cybersecurity workforce firm Iron Circle moved its headquarters from Florida to Columbia, creating 200 new jobs; and the Quantum Frederick data center campus continues to progress.

“We already have the talent and ambition in the state,” she said. “If we build the right policy ecosystem, technology and biotech will grow and create broad-based benefits for all residents.”

That said, Basu feels Maryland “continues to be outcompeted for technology-investment. “The tech tax further limits Maryland’s competitive appeal,” he said. “With its elevated corporate and personal property taxes, many entrepreneurs seek to expand their enterprises elsewhere.”

Statewide

Concerning conditions in the exurban and rural parts of the state, Basu was also apprehensive about how those areas will fare in 2026.

“Much of the policymaking emerging from Annapolis is really focused on the Baltimore-Washington Corridor. When, for instance, the governor speaks about quantum computing as a current and future economic driver, he is probably not thinking about Somerset or Allegany counties,” he said. “Those counties and others are being left behind.”

Kane agreed that lacking the synergies of the corridor can make economic development tougher. “The regions of Maryland located near out-of-state borders face real competitive pressure from neighboring states with lower business costs, taxes and energy prices,” she said.

Those views were supported by Ippolito. “I believe the outer regions of Maryland are more fragile than the counties within commuting distance to Baltimore and D.C.,” he said. “These communities are sensitive to issues like household debt, mortgage rate and discretionary income.”

Another view

While Michael Binko conceded the overall negative impact of the federal government uncertainty, he also offered a more historic perspective on today’s economic horizon. “It’s happened before,” said the co-founder of the DMV region of Startup America, STRT1UP Ventures and ENTEVATE, as he presented an optimistic scenario.

“Not since the end of World War II, and 30 years later at the end of The Cold War and the start of the Internet boom,” Binko said, “has The DMV had so many talented people from every industry available to spawn the next great innovations and ventures ― but now with an ecosystem for individuals and organizations that are ready to innovate,” including scientists, policy advocates and operational leaders making their next career move.

“Leveraging these talent pools quickly was how our region became a juggernaut,” Binko said. “If we can muster the focus and resources again, the next (r)evolutions of applied innovation and venture development, such as AI, quantum, energy resilience and health tech could re-energize the region.”

Being alert is critical, as these moments are “fragile and competitive, so our elected and industry leaders need to loosen fiscal policies that impact individuals and businesses,” he said. “The DMV has had to reinvent itself every 30 years. The key is matching these workers with new opportunities, then retention.”

Back in session

Finally comes the wild card that’s affecting the worldwide economy: artificial intelligence.

“People are going to have to brace for its impact,” Feuerman said. “For instance, a C-suiter at a local construction products company told me he’s trying to understand how AI will be safely implemented for sales efforts, as well as general operations.”

Kane added that it’s imperative “to address inconsistencies in Maryland’s 2024 privacy law and develop a balanced, innovation-friendly framework for AI” during the 2026 legislative session.

Still, “The state’s structural deficit has to be the number one issue,” said Ippolito. “The Maryland operating budget has grown by 50% during the last five years, which is not sustainable. Raising taxes (property and income) will add to more structural challenges for companies and households.

“The state general assembly needs to realize the federal support and increased tax revenue will not support a 50% increase in spending during the next five years,” he said.

Kane concurred. “Maryland needs to prioritize private-sector growth, recognizing that we cannot tax our way to competitiveness or long-term prosperity,” she said. “Our business climate is so challenging that it’s holding back economic growth, which is a key reason our economy isn’t keeping pace with other states.”

At its Policy Forum for Maryland’s Future, which the Maryland Chamber recently hosted at UMCP, Kane noted the addresses of two delegates. “We had Del. David Moon, the House majority leader; and Del. Vanessa Atterbeary, the House Way and Means committee chair, tell us there will be no new taxes,” she said, “though we have a $1.5 billion deficit for the second year in row.

“So it will be an interesting to see,” she said, “what cuts they’re proposing.”