Maryland lawmakers are pulling multiple strings while looking for the answer to fill a $3 billion hole in the state budget, including a controversial 2.5% business to business tax on services that has traction in both legislative houses while also generating skepticism.
The tax proposal is in two identical bills in the state House and Senate sponsored by two Democrats. Sen. Shelly Hettleman represents Baltimore County and Del. David Moon, majority leader of the House of Delegates, represents Montgomery County.
"With the federal government gouging our tax base and folks having questions about different aspects of the governor's proposal, it seemed prudent to have an additional option on the table, either to restore cuts or displace one of the other proposed revenue options," said Moon.
Democrats have massive majorities in the state legislature, controlling both houses by well over two-to-one margins.
"A business-to-business tax expansion would drive up costs for Maryland consumers and put Maryland businesses at a disadvantage against their out-of-state competitors," said Jared Walczk, vice president of state projects at the Tax Foundation.
"In the Maryland Democrats' obsession to raise taxes, they have now concocted a new business-to-business sales tax that will make it even more expensive to operate a business in Maryland," said Republican Senate Minority Leader Stephen S. Hershey Jr.
"With most of Maryland being an hour or less from the border of another state, many companies will seek out-of-state businesses to provide a variety of services to avoid paying this new tax," he said.
The proposed tax would target select business-to-business transactions including lobbying, accounting, tax preparation services and some computer and IT services. Its supporters claim it could generate roughly $1 billion, depending on which services end up being taxed.
Democratic Gov. Wes Moore
On Tuesday Moore released details of
The new version includes an $80 million diversion from the state's Strategic Energy Investment Fund to the general fund. Another $37 million would be cut from proposed statewide salary increases for non-union staff across the executive branch.
It does not include a business-to-business tax.
Additions include a $9 million boost "to manage an anticipated surge in unemployment insurance claims and to help expedite the state's hiring of former federal employees who have been impacted by Trump Administration personnel and budget action over fiscal years 2025-2026."
An extra $37 million would go to the state's FAMLI program that covers medical and family leave insurance, another hedge to counter the loss of federal jobs.
"Given the sweeping and unprecedented changes at the federal level and a high degree of uncertainty for Maryland employers, the department is seeking approval to extend the FAMLI implementation timeline by 18 to 24 months, delaying the collection of new Special Fund revenue to fund implementation costs in fiscal year 2026," the governor's proposal says.
"At a time of instability and challenge for our state and country, this budget proposal promotes certainty and results," he said in the statement introducing the revised budget.
"We will continue to move in partnership with the Maryland General Assembly to deliver a final budget that meets each of these goals and confronts crisis with courage," he said.
Moore's January budget proposal included hiking the income tax on the state's wealthiest wage earners combined with a tax reduction for lower wage earners and spending cuts. So far, the governor has not signaled strong support for the business-to-business tax.
The House is expected to send its version of the budget bill to the Senate by March 19.
The ensuing debate and horse-trading between the houses will be influenced by revenue projections from the Board of Revenue Estimates scheduled for release on Thursday.
Maryland is home to an estimated 160,000 federal workers putting them in the danger zone for the Trump administration's plans to
S&P Global Ratings examined possible ramifications for federal upheaval spilling over onto state and local governments in a report published Feb. 27.
"U.S. states receive more than 30% of their operating revenue from the federal government, whereas U.S. local governments receive less than 5%," the rating agency wrote in the report helmed by credit analyst Jane Ridley.
"Uncertainty is the new reality, both in terms of federal policies that have been announced and in terms of prospective changes that could affect operations," the report said.
Many factors, including the severity and duration of these policy changes, could affect longer-term outcomes for credit quality."
The specific policy details may not be as important as their broad economic impact, the report said.
"In our view, bigger-picture shifts and changes, such as slower economic growth or the possibility of municipal bonds' losing tax exemption in the Tax Cuts and Jobs Act renegotiation, could have a more wide-ranging effect on all governments across the country," the report said.
Maryland general obligation bonds carry across-the-board triple-A ratings from Moody's Ratings, S&P Global Ratings and Fitch Ratings.
In October, S&P affirmed its AAA rating and stable outlook for the state's general obligation debt.
"Maryland's stable and resilient economy with a strong government presence and high wealth and income levels are key credit strengths for the state," said credit analyst Joe Pezzimenti.
In March of 2024, Fitch affirmed its AAA but its written analysis noted a potential weakness.
"The state's economy largely benefits from proximity to the nation's capital. However, exposure to federal budget changes poses a greater uncertainty for Maryland than for most states given its large federal agency presence and associated private contracting," said Fitch.
