Governor Wes Moore’s fiscal 2026 spending plan blends fiscal responsibility with targeted investments in education, public safety, and workforce development, alongside substantial tax reforms and funding shifts. It presents opportunities and challenges for counties, pairing increased funding for critical services with new cost burdens and funding uncertainties.
The governor’s $65.3 billion proposed budget reduces the structural deficit, maintains reserves for economic challenges, and balances targeted investments with cost-cutting measures to address immediate and long-term priorities.
The governor’s budget presents opportunities and challenges for county governments. It increases funding for K-12 education, transportation aid, and community colleges, reinforcing a commitment to public services and infrastructure.
However, the proposed budget also reduces Disparity Grants for counties with the greatest need, introduces additional cuts to targeted aid programs, and relies heavily on temporary funding sources, creating uncertainty.
The accompanying Budget Reconciliation and Financing Act (BRFA) compounds these issues by forcing county governments to shoulder nearly all property assessment costs, phasing out State support for Enterprise Zone tax credits, and shifting more pension burdens onto counties. These BRFA provisions fundamentally disrupt the balance of State and local fiscal responsibilities, placing considerable pressure on counties already managing rising demands for essential services.
The governor’s spending plan also introduces a progressive overhaul of Maryland’s income tax system, increased funding for public safety programs, and investments in workforce development. It strengthens reserves to prepare for economic uncertainties and prioritizes transit systems and infrastructure improvements to support long-term growth.
Toplines
- Total All Funds Operating Budget: $67.3 billion (1.2 percent increase from fiscal 2025)
- General Fund Operating Budget: $27.0 billion (-1.0 percent decrease from fiscal 2025)
- Special Funds: $20.6 billion (8.4 percent increase from fiscal 2025)
- Federal Funds: $19.7 billion (-2.6 percent decrease from fiscal 2025)
Budget Growth (fiscal 2025 to 2026)
- Total spending grows by $793 million (1.2 percent) to $67.3 billion.
- General fund spending drops by $274 million (-1.0 percent).
- Special fund spending increases by $1.6 billion (8.4 percent), driven by education and transportation funding.
- Due to reduced Medicaid claims, federal fund spending falls by $533 million (-2.6 percent).
Significant Drivers of Growth
- The Blueprint for Maryland’s Future Fund grows by $543 million, advancing education investments.
- Transportation spending rises by $343 million, supported by $206 million in proposed tax and fee increases.
- Climate-related initiatives gain $90 million in funding.
- Through tuition, fees, and grants, higher education spending increases by $160 million.
General Fund Balance
- The plan projects a $106 million balance at the end of fiscal 2026.
- The Rainy Day Fund will hold $2.1 billion, equaling 8 percent of general fund revenues.
What Does It Mean for Counties?
Local Government Aid
Note: The State budget often highlights “local aid” as a significant investment in Maryland’s counties. However, the overwhelming majority of this funding is earmarked for public education and provides little to no direct support for county operations or services.
The fiscal 2026 budget provides $11.4 billion in aid to local governments, an increase of $599.4 million (5.5 percent) over fiscal 2025, including contingent reductions.
The primary increases include an additional $551 million for K-12 education aid, $53 million for transportation, and $22 million for community colleges.
K-12 Education
The governor’s fiscal 2026 budget includes $8.9 billion in funding for K-12 education. While the pause on collaborative time and community schools generates savings, the additional $25 million in special education costs and nearly $93 million in retirement costs place significant new burdens on county budgets, which fund schools in Maryland.
State aid details by category:
- Foundation Program: The largest single local aid program distributes aid based on public school enrollment and taxable wealth. The budget reflects a contingent reduction to delay collaborative time, generating savings for the State and counties.
- Special Education: Aid for special education totals approximately $551 million, helping cover the costs of educating students with specialized needs. However, the BRFA reduces the State’s share of nonpublic special education placement costs from 70 to 60 percent, shifting $25 million to local school systems, which counties must absorb.
- Compensatory Education: Based on enrollment and need, $1.5 billion in funding is directed toward students eligible for free and reduced-price meals.
- Student Transportation: The proposed budget provides $357 million for student transportation, including specific grants for transporting students with special needs.
- Other Education Aid: The proposed budget includes $544.7 million for students with limited English proficiency, $492.6 million for high-poverty schools, $172.6 million for phased-in universal prekindergarten, and $66.7 million for the Guaranteed Tax Base Program.
Significant Retirement Costs Shift to Counties
Starting in fiscal 2026, the Budget Reconciliation and Financing Act (BRFA) proposes permanently shifting a significant share of State pension and retirement costs for teachers and school employees to counties, significantly increasing local funding responsibilities. This includes two significant changes:
New Local Contributions for Pension Costs
- The BRFA proposes to make county governments directly responsible for increased pension contributions for teachers and school employees starting in fiscal 2026. The State calculates these contributions based on local teacher salaries, transferring an additional $92.9 million to counties. This new mandate would strain local budgets, forcing counties to absorb the costs or find alternative revenue sources.
Supplemental Retirement Grants Phased Out
- At the same time, the BRFA reduces supplemental retirement grants under Aid to Civil Divisions by 50 percent in fiscal 2026 and eliminates the program by fiscal 2027. The State pledged these grants in 2012 when it shifted a significant portion of teacher pension costs to county governments. Before this change, the State fully funded teacher pension contributions. In fiscal 2025, counties relied on these grants to offset pension costs, but the phase-out leaves counties to shoulder the entire burden.
Community Colleges
The governor’s budget allocates $500.6 million for Maryland’s community colleges, a $22.5 million increase over fiscal 2025. The funding includes $11.8 million for small colleges, $6 million for out-of-county and out-of-state student programs, and $4.7 million for English for Speakers of Other Languages (ESOL) programs.
The State covers pension and retirement benefits for community college employees, amounting to $57.8 million in fiscal 2026. However, the BRFA proposes to shift approximately $5 million of rising retirement costs to counties.
Transportation
The governor’s budget allocates $478.8 million for local transportation aid, including Highway User Revenues (HUR), Locally Operated Transit Systems (LOTS), Elderly and Disabled Transportation, and Bus Rapid Transit. Total funding represents a $52.7 million increase (12 percent) over fiscal 2025.
- Highway User Revenues: Local governments receive $445.8 million in HUR, which remains held harmless in the fiscal 2026 budget. This ensures continued funding stability for county road and bridge maintenance. However, counties remain vulnerable to a significant funding cliff in fiscal 2027 unless further legislative action extends these funding levels.
- Locally Operated Transit Systems (LOTS): The budget increases funding for grants to LOTS, which support essential transit services operated by counties.
- Elderly and Disabled Transportation: Counties receive $6 million to support transit services for elderly and disabled residents, including paratransit operations required under federal law.
- Bus Rapid Transit: The budget allocates $27 million annually from the State Lottery Fund to eligible jurisdictions with Bus Rapid Transit systems. Montgomery County receives at least $20 million as an eligible grantee, and the remaining funds are distributed based on population.
Police, Fire, and Public Safety
The governor’s budget allocates $214.3 million for public safety aid to counties and municipalities, an increase of $3.1 million over fiscal 2025. This funding supports police protection, fire and rescue services, and special grants for targeted initiatives.
- Aid for Police Protection: Local governments receive $121.8 million to support police services, distributed based on population and expenditures. The budget includes $45.9 million in enhancement funding above the mandated formula, including $17.1 million for Baltimore City.
- Aid for Fire, Rescue, and Ambulance Services: Counties and municipalities receive $16.5 million in grants for fire, rescue, and ambulance services, including funding for capital renovations and equipment.
- Special Grants: The budget includes $75.9 million in special grants for public safety programs. These grants fund initiatives such as the STOP Gun Violence grants, domestic violence units, police recruitment and retention, and the Maryland Criminal Intelligence Network.
Miscellaneous Aid: Disparity Grant Reductions and Local Health Increases
The governor’s fiscal 2026 budget allocates $433.9 million for miscellaneous aid, a decrease of $34.1 million (7.3 percent) from fiscal 2025. This category includes funding for Local Health Grants, Disparity Grants, and Video Lottery Terminal (VLT) Impact Aid.
Note: Even though local health grants are increasing, Maryland’s outdated funding formula continues to leave local health departments underfunded, creating ongoing fiscal strain amid rising costs and evolving public health challenges.
- Local Health Grants: Funding increases to $117 million, up $5.8 million (5.2 percent) from fiscal 2025. These grants support preventative health services such as family planning, maternity care, cancer control, and AIDS education.
- Disparity Grants: Funding decreased from $188.5 million in fiscal 2025 to $176.6 million in fiscal 2026, a reduction of $11.9 million (6.3 percent). These grants assist counties with lower per capita income tax revenues.
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VLT Impact Aid: Jurisdictions with Video Lottery Terminal facilities receive $104.9 million, with Prince George’s County and Baltimore City being the largest recipients. This aid decreases slightly from fiscal 2025 but remains a vital revenue source for impacted jurisdictions.
Income Tax Overhaul
The governor’s proposed budget includes significant reforms to Maryland’s income tax system, designed to simplify calculations, provide relief for taxpayers, and increase revenues. According to the governor, these changes will increase State and local income tax revenues, which are significant revenue sources for counties.
The governor’s spending plan proposes a package of personal income tax modifications expected to generate $820 million in general fund revenue in fiscal 2026.
The table below illustrates the proposed changes to the tax brackets and a new surcharge on capital gains income over $350,000.
Other proposed income tax changes include:
- Increasing the maximum standard deduction from $2,250 for single filers and $4,500 for joint filers to $5,600 and $11,200, respectively.
- Eliminating the current phase-in of the standard deduction, ensuring all households qualify for the $5,600/$11,200 deduction regardless of income.
- Removing the option to itemize deductions.
- Modifying the child tax credit to phase out benefits gradually. Currently, households lose the $500 per child benefit once their income exceeds $15,000.
Corporate and Tax Policy Reform
The governor’s proposed corporate and tax policy reforms carry negligible direct fiscal impacts for counties overall. Still, specific changes, such as the phase-out of State funding for Enterprise Zone (EZ) tax credits, place new responsibilities squarely on counties. These reforms represent significant shifts in Maryland’s tax structure, aiming to enhance competitiveness, simplify the tax code, and align with neighboring states.
- Corporate Income Tax Reform
- Lower Corporate Tax Rate: The budget proposes a new corporate income tax rate of 7.99 percent, reduced from the current 8.25 percent, making Maryland more competitive for businesses.
- “Water’s Edge” Combined Reporting: This reform broadens the tax base by treating all related U.S. business entities as a single entity for Maryland tax purposes. The proposal curtails tax avoidance strategies and ensures corporations with substantial Maryland operations pay taxes on income earned in the State.
- Tax Policy Adjustments
- Eliminating the Inheritance Tax: The proposal eliminates Maryland’s inheritance tax and offsets revenue losses by lowering the estate tax exemption from $5 million to $2 million.
- Increases in Gaming Taxes:
- The sports wagering tax rate rises from 15 percent to 30 percent.
- The table game tax rate increases from 20 percent to 25 percent.
- Cannabis Tax Increase
- The tax rate on adult-use cannabis rises from 9 percent to 15 percent, effective fiscal 2027.
- Enterprise Zone (EZ) Tax Credits
- The BRFA phases out State funding for EZ tax credits, which have provided critical support for incentivizing business development in economically distressed areas. Under the BRFA, the program sunsets on June 30, 2025.
SDAT Cost Shift: A Misguided Burden on Counties
The governor’s budget revives a familiar and troubling proposal to shift the State Department of Assessments and Taxation (SDAT) costs nearly entirely onto county governments. Counties reimburse the State for 50 percent of SDAT’s operating costs. The BRFA seeks to increase this share to 90 percent, imposing an additional $20.9 million burden on counties.
This cost shift is both unnecessary and harmful for several reasons:
- Undermines Objectivity: Shifting 90 percent of assessment costs onto counties risks compromising the objective nature of property assessments. The current system, where SDAT remains primarily funded and managed by the State, ensures unbiased valuations and protects taxpayer confidence.
- Creates Fiscal Inequities: While counties benefit from the revenue SDAT assessments generate, the State and its residents equally benefit from uniform procedures, consistent valuations, and streamlined appeals processes. Forcing counties to shoulder the bulk of the costs ignores the shared benefits of SDAT’s work.
- Jeopardizes Budgetary Accountability: The Department of Legislative Services (DLS) has repeatedly warned against increasing counties’ cost share for SDAT. By placing the financial burden on counties, the State loses a critical incentive to manage SDAT’s budget and ensure efficient operations carefully.
Counties face significant fiscal challenges, including funding education, transportation, public safety, and other essential services. Absorbing an additional $20.9 million for SDAT would divert resources from these priorities, leaving counties struggling to meet local needs.
The General Assembly has consistently rejected this proposal in prior legislative sessions for good reason. MACo has consistently opposed this cost shift, advocating successfully to strike similar attempts from the State’s fiscal plans in 2017, 2018, 2020, and 2021.
School Construction
The governor’s fiscal 2026 capital budget provides $824.7 million for school construction, an increase of $57.4 million over previous plans. This funding meets the legislative intent to allocate $450 million for public school construction programs.
Allocations include:
- $9.1 million from the Fiscal Responsibility Fund to support statewide school construction needs.
- $53.9 million for the Supplemental Capital Grant Program, focusing on fast-growing counties experiencing overcrowding.
- $90 million for the Health School Facility Fund to address health-related building improvements.
- $6.1 million for the Aging Schools Program to support facility upgrades for older buildings.
The budget also continues the $1.7 billion Built to Learn Fund, providing $302.2 million in revenue bonds for renovation and construction projects, repaid using casino revenues from the Education Trust Fund. Additionally, $27 million annually from the Built to Learn Fund supports critical school projects in Prince George’s County through public-private partnerships.
What’s Ahead?
The governor’s fiscal 2026 fiscal plan is subject to General Assembly approval, where lawmakers will review and make adjustments while weighing its impacts on counties and communities across Maryland.
By custom, the House and Senate move the budget bill in alternate years – the House moves the budget in odd-numbered years, and the Senate moves the budget in even-numbered years. For example, the budget bill will start in the House this year.
As the budget moves to the General Assembly for review, MACo will advocate for a more balanced approach that supports essential services without overburdening local governments.
Stay tuned to Conduit Street for more information.
Useful Links
Proposed Budget Documents (fiscal 2026):
Proposed Operating Budget Detail by Agency
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