Washington, DC’s deepening local fiscal crisis may spell trouble for Maryland, which faces mounting challenges — federal funding cuts, slowing state revenues, and growing local burdens create uncertainty for policymakers and new financial pressures for counties.
Washington, DC’s latest revenue forecast signals deepening economic challenges that could soon play out in Maryland. The District sharply lowered its projections, citing federal job losses, weaker income tax growth, and slowing consumer spending. Unlike past downturns, these declines may not rebound.
Maryland is already struggling with sluggish revenue growth and widening deficits. The state’s economy depends heavily on federal jobs and funding. As Congress debates deep cuts to healthcare, education, and infrastructure, Maryland’s fiscal future looks increasingly fragile.
Maryland’s Fiscal Outlook — Revenue is Weak, Deficits Are Growing
Maryland’s budget faces severe shortfalls and tepid revenue growth:
- Personal income tax revenue barely grew, rising just 1.1% year-over-year.
- Sales tax collections are nearly flat, up only 0.3% in fiscal 2025.
- The budget faces a $3 billion shortfall in fiscal 2026, growing to $6 billion in fiscal 2030.
As previously reported on Conduit Street, Governor Wes Moore’s plan includes $2 billion in spending reductions, revenue enhancements, cost shifts to local governments, fund transfers, and a lower Rainy Day Fund balance. However, state leaders warn that even deeper cuts may be needed as federal funding becomes uncertain.
Federal Job Cuts — A Direct Hit to Maryland’s Economy
DC expects a 21% drop in federal employment, with significant implications for Maryland.
Maryland is home to 161,000 federal workers, and their salaries generate $1 billion in state income tax revenue.
- 8% of Maryland tax filers receive a federal W-2, underscoring the state’s reliance on these jobs.
- Federal wages account for 12% of total income in Maryland.
- Federal contract spending in Maryland totaled $42 billion in 2023, equal to 10% of the state’s private-sector economy.
If Congress enacts deep federal budget cuts, these numbers could shrink quickly. Counties with sizeable federal employment hubs — Calvert, Montgomery, Prince George’s, Anne Arundel, and St. Mary’s — would feel the effects first.
Sales Tax Woes — Consumer Spending is Slowing
DC’s latest budget warns of plummeting sales tax revenue as fewer workers shop and dine downtown.
Maryland’s economy has held up slightly better, but cracks are forming:
- Sales tax collections are underperforming, growing just 0.3% in fiscal 2025.
- Consumers are cutting back, squeezed by inflation and economic uncertainty.
- Federal job losses could slow spending further, shrinking local tax revenues.
Reduced Income and Consumer Spending
Federal job losses and economic uncertainty could reduce household income and shrink consumer spending, impacting local businesses, restaurants, and retail. With fewer paychecks circulating in the economy, counties with high federal employment could see weaker local tax revenues.
This decline in spending can trigger a downward economic spiral, where reduced business revenue leads to job losses in the private sector, further slowing growth. The last federal shutdown showed how even short-term disruptions in federal paychecks ripple through Maryland’s economy, cutting state and local tax collections.
Commercial and Residential Real Estate Markets
Federal workforce reductions could offset any benefits from the federal return-to-office mandate, keeping the commercial real estate market on its current weak trajectory. DC’s forecast shows no expected rebound in office occupancy, and Maryland’s urban and suburban business districts will likely see continued low demand for office space.
On the residential side, federal job cuts could weaken housing demand, particularly in counties where government workers make up a significant share of homeowners. Declining demand could put downward pressure on property values, affecting home sales and property tax revenue. Counties must plan for potential assessment declines if these trends continue.
Federal Budget Uncertainty — More Risks for Maryland
Congress is considering deep cuts that could directly impact Maryland’s budget.
Healthcare & Medicaid Funding
- If Congress reduces the federal match, Maryland’s ACA expansion could lose $900 million to $1.2 billion annually.
- Proposed block grants or per capita caps could limit federal Medicaid support, significantly increasing costs.
Education Cuts & Cost Shifts
- Federal reductions to Title I (low-income student funding) and IDEA (special education) could force Maryland to cover the gaps.
- The Blueprint for Maryland’s Future already strains state and local budgets. Additional funding reductions could push costs to counties.
Infrastructure & Transit Risks
- Federal highway and transit funding could decline, slowing road repairs and increasing county maintenance costs.
- Community Development Block Grants (CDBG) face cuts, affecting local housing and economic development projects.
Shutdown Threat in March — A Major Economic Risk
A temporary funding deal avoided an immediate shutdown, but the March 14 deadline for a new continuing resolution keeps Maryland vulnerable. With over 160,000 federal jobs and tens of thousands of contractors, Maryland is disproportionately impacted by federal funding lapses.
The 2018-2019 partial shutdown demonstrated these risks, with Maryland workers missing $778 million in wages and the state losing millions in tax revenue. Contractors, often without retroactive pay, could face even steeper losses, echoing past economic strain.
Businesses tied to federal operations would also suffer, cutting state and county tax bases and threatening local economies, particularly in areas with high federal employment.
MACo Urges General Assembly to Reject Cost Shifts
At last week’s hearings on the Budget Reconciliation and Financing Act (BRFA) of 2025, MACo urged the General Assembly to resist provisions that shift over a quarter billion dollars in costs to county governments. With counties already facing fiscal strain from federal uncertainty, these proposed changes would force difficult local budget decisions, limit services, and place more pressure on property taxpayers.
State Budget Shifts Compound Federal Fiscal Pressures
The BRFA and subsequent Department of Legislative Services (DLS) analyst recommendations include significant cost shifts and cuts, adding new financial burdens while reducing State support for critical local services.
- Teacher Pension Cost Shift – The BRFA shifts 100% of the unfunded teacher pension liability increase between fiscal 2025 and fiscal 2026 onto counties. This shift increases county expenditures by $186 million annually starting in fiscal 2026.
- Eliminating Supplemental Pension Grants – The BRFA cuts supplemental retirement grants under Aid to Civil Divisions by 50% in fiscal 2026 and eliminates them in fiscal 2027. The State initially committed to these grants in 2012 when it transferred teacher pension costs to counties. Eliminating this support would cost affected counties $28 million.
- State Department of Assessments and Taxation (SDAT) Cost Shift – Counties currently reimburse the State for 50% of SDAT’s operating costs, which fund property assessments and valuation systems. The BRFA increases this share to 90%, adding $21 million in new county costs.
- Community College Employee Retirement Costs – The BRFA shifts $5 million in new costs for community college employee retirement onto counties, despite counties never previously responsible for these expenses.
- Special Education Nonpublic Placement Cost Shift – The State’s share of nonpublic special education placement costs drops from 70% to 60%, shifting $25 million in costs onto local school systems. Since counties fund local school boards, this shift directly increases county obligations.
- Enterprise Zone Tax Credit Elimination – The BRFA phases out State funding for Enterprise Zone tax credits by June 30, 2025, eliminating a key incentive for business investment in distressed areas. The loss of this credit will cost Baltimore City alone $100 million over the next decade and could disrupt economic revitalization efforts statewide.
- Cutting Local Program Open Space Funding: DLS analysts recommended freezing all State Program Open Space land purchases for four years and cutting the county share of Program Open Space funds by 50%.
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Wrongful Conviction Compensation Cost Shift: Local governments may be required to cover 50% of compensation for wrongly convicted individuals. DLS analysts proposed a state-local cost split for erroneous conviction settlements approved by the Board of Public Works in fiscal 2026. County governments have no authority or oversight concerning the prosecution of criminal cases.
Counties Have No More Room to Absorb State Cost Shifts
More than two-thirds of Marylanders already live in counties that impose the maximum 3.2% local income tax rate, leaving property taxes as the only remaining local revenue option. These cost shifts disproportionately impact working families, exacerbate housing affordability challenges, and worsen fiscal pressures stemming from federal budget cuts and economic uncertainty.
What’s Next?
Maryland’s Board of Revenue Estimates will meet on Thursday, March 6, to vote on revised general fund revenue estimates for fiscal 2025 and 2026.
This update carries added significance as Maryland faces mounting budget challenges and uncertainty from federal fiscal policy shifts. With DC projecting long-term revenue losses and Maryland contending with a $3 billion deficit, these forecasts will provide policymakers with critical insights into economic trends and expected revenue shortfalls as they finalize the state budget.
Meanwhile, General Assembly leaders are weighing budget decisions as Congress approaches the March 14 deadline for a continuing resolution, recognizing that federal funding decisions, executive actions, and policy shifts could significantly impact Maryland’s fiscal outlook. Given the uncertainty at the state and federal levels, a special session may be necessary to address funding shortfalls, cost shifts, and other fiscal challenges.
As the budget process unfolds, MACo will continue to oppose cost shifts and unfunded mandates that place additional burdens on county governments. With counties already managing rising costs, workforce challenges, and limited local revenue options, absorbing new state obligations would only exacerbate fiscal pressures.
As the General Assembly navigates difficult budget decisions, MACo remains committed to advocating for a fair, balanced approach that protects essential county services and ensures local fiscal stability.
Stay tuned to Conduit Street for more updates.
Previous Conduit Street Coverage
MACo: State Budget Plan Forces Counties Into Higher Taxes or Service Cuts
Legislative Analysts: Invoice Counties Another $93M for Entire Pension Shortfall
Federal Budget Threats Could Deepen State Budget Woes, Squeeze Counties
Previous Conduit Street Coverage: Gov’s Proposed Income Tax Overhaul: County-by-County Effects
Previous Conduit Street Coverage: DLS Fiscal Briefing Reveals Cost Shifts and Budget Challenges
Previous Conduit Street Coverage: Governor’s Fiscal 2026 Budget: Navigating County Effects
