BRE-BRFA-Proposal-AnalysisAs previously reported on Conduit Street, Governor Wes Moore’s fiscal 2026 spending plan represents one of the most significant income tax overhauls in years, with far-reaching effects on local budgets, economic growth, and service funding.
The latest Bureau of Revenue Estimates (BRE) analysis details the governor’s proposed income tax overhaul and its significant impact on county budgets. The analysis includes the county-by-county effects, highlighting how the proposal will impact local revenues, taxpayer liabilities, and fiscal planning across Maryland’s jurisdictions.
Below, Conduit Street breaks down key elements of the proposal, the county-by-county impact, and what’s at stake for local governments.
Top Line Numbers
State and County Revenue Impact
- $600 million/per annum in new State revenue from income tax changes, eliminating itemized deductions, and a capital gains surcharge.
- $100 million in additional county income tax revenue, though the impact would vary widely depending on local taxpayer demographics and income distribution.
Taxpayer Impact
- Sixty percent of taxpayers would see a modest tax cut averaging $173.
- Twenty percent would face a tax increase averaging $1,458.
Changes to the Income Tax System – Who Pays More?
The BRFA proposes significantly restructuring Maryland’s income tax brackets and deductions, creating winners and losers across the state.
The income tax overhaul would affect most Maryland taxpayers. About 60 percent would see a modest tax cut, averaging $173, while 20 percent would face an average tax increase of $1,458.
The changes would primarily benefit lower-income taxpayers while increasing liabilities for higher-income earners, particularly those at the top, who would have paid an additional $20,800 in taxes. However, some moderate-income taxpayers who itemize deductions would also see higher tax bills.
The one percent capital gains surcharge applies to taxpayers with federal adjusted gross income over $350,000, affecting about 55,200 filers in the tax year 2020. More than three-fourths of all capital gains would have been subject to the tax, with the average increase per taxpayer at $2,442.
However, the bulk of the revenue—over 75 percent—would have come from approximately 10,200 taxpayers earning more than $1 million, with their average tax hike reaching $10,393.
Significant Takeaways:
- The proposal raises taxes on top earners by limiting itemized deductions and temporarily increasing the tax rate on capital gains.
- The most significant impact would be in counties with large numbers of high-income earners, such as Montgomery, Howard, and Talbot.
- Expanding the standard deduction relieves many middle-class taxpayers, but counties with lower median incomes would see minor overall revenue changes.
Eliminating Itemized Deductions – County-By-County Effects
The 2017 federal Tax Cuts and Jobs Act (TCJA) triggered a significant shift in taxpayer behavior, leading most Marylanders to take the standard deduction rather than itemizing. Before TCJA, 53 percent of taxpayers itemized, but by 2023, only 20 percent did, increasing State and local tax revenues. Despite this shift, itemizers still claimed $18.4 billion in deductions—70 percent of all deductions.
High-income taxpayers are likelier to itemize, benefiting from mortgage interest, property taxes, and charitable contributions, however, about one-quarter of Maryland taxpayers earning $1 million or more still take the standard deduction.
With TCJA set to expire at the end of 2025, Maryland faces significant revenue uncertainty. Without congressional action, federal tax rules will revert to pre-2018 law, pushing more taxpayers back into itemizing. This shift would reduce State and local income tax revenues by an estimated $300 million annually starting in fiscal 2027 at the State level and $200 million annually for counties.
The BRFA proposes eliminating itemized deductions at the State level, effectively decoupling Maryland from federal changes. This move would prevent revenue losses and maintain the current forecasted revenues for state and local governments. However, the final fiscal impact depends on federal action and local budget assumptions.
County Impacts
- Montgomery and Howard counties would contribute the bulk of new capital gains revenue due to their high concentration of taxpayers with investment income.
- Rural counties and lower-income jurisdictions may see revenue losses and could experience shifts in State funding allocation if overall tax revenues decline.
- The proposal raises equity concerns, as counties generating the most revenue from these changes may not see proportional reinvestment in local services.
Capital Gains Surcharge – The Local Implications
The proposed income tax overhaul includes a surcharge on capital gains income, a move that disproportionately affects wealthier jurisdictions.
County Impact:
- Montgomery and Howard counties will contribute the bulk of new capital gains revenue due to their high concentration of taxpayers with investment income.
- Rural counties and lower-income jurisdictions may see minimal direct impact but could experience shifts in State funding allocation if overall tax revenues decline.
- The proposal raises equity concerns, as counties generating the most revenue from these changes may not see proportional reinvestment in local services.
Combined Impact of Proposals
The first chart illustrates State tax payments under current law. The following two charts show the impact of proposed changes to income tax rates, deductions, and capital gains by federal adjusted gross income.
The final map and charts provide a county-by-county analysis, showing the percentage change in State taxes due to the combined effects of adjustments to tax rates, deductions, capital gains, and the child tax credit.
What’s Ahead?
The governor’s fiscal 2026 budget 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
Bureau of Revenue Estimates Analysis of SB 321 / HB 352, The Budget Reconciliation and Financing Act
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