The State’s Disparity grant program will be the subject of an interim study this year, as the current law references a single county tax rate as part of its implementation, and has not yet reflected the ability for counties to adopt a tier-bracketed tax system. MACo will advocate that this attention be broadened to also include addressing the formula’s year-to-year unpredictability.

Maryland, the only state in the US that requires each of its counties to levy a personal income tax as a principal revenue measure, has supported a Disparity Grant program since the early 1990s. The intent of the Disparity Grant is to ensure that each jurisdiction receives at least a certain minimum level of funding, based on its income tax levy — by bringing lower-wealth jurisdictions up to a certain threshhold.

In recent years, the disparity grant has been adjusted two times, with a “cap” in dollars placed for counties at their FY 2010 level, and then a seleced additional share if the county tax rate demonstrates a certain level of local effort. From the DLS Operating Budget Analysis this session:

Counties with per capita income tax revenues less than 75% of the statewide per capita tax revenue receive grants unless a county has an income tax rate below 2.6%. Under current law, aid received by counties equals the lesser of the dollar amount necessary to raise the county’s per capita income tax revenues to 75% of the statewide average or the amount received under the cap provisions. A cap on the grant is set at the county’s fiscal 2010 grant amount. However, if an eligible county’s grant amount determined by the formula is higher than the county’s maximum grant amount, the county is provided a portion of the uncapped amount. The size of the grant is then based on the county income tax rate, as follows:

• from a tax rate of 2.8% to 2.99%, 20% of the uncapped grant amount;
• from a tax rate of 3% to 3.19%, 40% of the uncapped grant amount;
• and at a tax rate of 3.2% (the maximum), 75% of the uncapped grant amount.

The net effect of this “cap” calculation is that the overall grant program was blunted by more than $55 million in the approved FY 2025 budget plan.

Because the disparity grant law references one county tax rate, it is due to a modernization – because counties have recently been granted authority to implement local brackets in their own tax structures. The General Assembly included a directive to study and report on this matter in its budget plan.
As detailed in the Joint Chairmen’s Report:

Adoption of Bracket-based Income Tax Beginning Tax Year 2023:

Chapter 23 of the 2021 special session requires all local governments to impose a minimum tax rate of 2.25% and a rate up to 3.2%. It also authorizes local governments to impose the county income tax on a bracket basis and alters the local income tax rates that a jurisdiction must impose to qualify for enhanced State funding under the Disparity Grant Program. Since the enactment of Chapter 23, Anne Arundel and Frederick counties have adopted bracket-based income tax rates. The adoption of bracket-based income tax rates beginning tax year 2023 impacts the disparity grant amount calculation beginning fiscal 2026 allowance. The committees request that the Department of Budget and Management (DBM), in consultation with the Office of the Comptroller, submit a report on how the adoption of bracket-based income tax rates beginning tax year 2023 by jurisdictions impacts the calculation of the disparity grant, how the tax revenue will be calculated, and how it will calculate the disparity grant amount.

On the Conduit Street podcast in February, MACo discussed the year-to-year variability of the Disparity Grant calculation, under the heading What Do You Do About Fluky Formulas?

The Department of Legislative Services also noted this year’s fluctuation in its operating budget analysis:

Disparity grants decline in all jurisdictions a net decrease of $31.6 million except for Allegany County, where the amount increases by $1.8 million, or 32.6%, and Dorchester County, where the amount increases by $508,389, or 12.9%. Prince George’s County’s grant declines by $29.2 million, or 29.7%, and Wicomico County’s grant declines by $2 million, or 13.3%. The changes are formula driven. Allegany County’s net local tax revenue for tax year 2022 decreased by $14.9 million, or 30%, leading to an increase in its per capita grant amount. Prince George’s County has seen a population decline, while tax revenues have remained stable. This leads to a lower per capita grant amount.

In light of the already-envisioned study, MACo will seek to work with the Office of the Comptroller to evaluate policy options to offer some more predictability in the Disparity Grant on a year-to-year basis, perhaps following the model employed by State education formulas that employ rolling three year averages as a floor in such calculations.

Read the DLS budget analysis for additional background on the Disparity Grant history and calculations:
2025fy-budget-docs-operating-A15O00-Payments-to-Civil-Divisions-of-the-State.pdf (maryland.gov)