The latest report from the Board of Revenue Estimates (BRE) paints a stark picture for Maryland’s fiscal outlook, with declining tax revenues and looming federal cutbacks casting a long shadow over the state’s economy.
The March revenue revision slashes projections by $280 million over fiscal 2025 and fiscal 2026, primarily driven by weakening personal income tax collections and the growing impact of federal job reductions.
The BRE, which includes Comptroller Brooke Lierman, Treasurer Dereck Davis, and Department of Budget and Management Secretary Helene Grady, projects Maryland will generate $25.1 billion in fiscal 2025 and $25.2 billion in fiscal 2026, reflecting marginal growth of 1.1% and 0.1%, respectively.
The BRE report reflects steep declines across significant tax sources, including:
- Personal income tax: Down $343.7 million over two years as federal layoffs and workforce reductions shrink Maryland’s tax base.
- Corporate income tax: Slashed by $50.4 million, reflecting a weaker business climate.
- Sales tax: Cut by $27.8 million, as economic uncertainty tempers consumer spending.
- Other revenues: A $75 million increase offsets some losses, but the State faces significant shortfalls overall.
Because counties in Maryland collect local income tax as a “piggyback tax“ on the state’s personal income tax, reductions in taxable wages directly shrink county revenue streams, limiting funding for essential local services.
Federal Retrenchment Hits Maryland Hard
Federal employment and contracting drive Maryland’s economy. The state’s 161,000 direct federal civilian jobs and 250,000 Maryland residents working in Washington, DC generate billions in taxable wages.
The latest forecast warns of deep disruptions ahead:
- Attrition and hiring freezes: Roughly 9,000 Marylanders leave federal service each year. Without replacements, withholding tax collections could drop 0.4% annually.
- Federal layoffs: At least 15,000 probationary employees in Maryland face immediate risk, with broader reductions on the table.
- Contracting slowdown: Federal defense and nondefense contracts account for 10% of Maryland’s private-sector GDP. Budget cuts could stall this key economic driver.
- Outmigration risk: Laid-off federal workers may relocate, shifting taxable income out of Maryland.
These workforce reductions will erode the state’s income tax base, the State’s largest revenue source, further complicating budget planning for counties already navigating fiscal constraints.
Worse Than Sequestration
The BRE report draws a direct comparison to the 2013 federal sequestration, which slowed Maryland’s labor market and cut withholding tax growth. This time, the situation looks even worse — job cuts are happening faster and at a larger scale.
During sequestration:
- Federal spending dropped 10.7% for discretionary programs.
- Maryland lost 7,917 federal jobs between 2012 and 2014.
- Mass layoffs hit 2,940 federal contractors over three years.
The March forecast warns that Maryland could see a steeper employment and tax revenues decline, especially if a prolonged federal government shutdown or agency relocations materialize.
The Growing Threat to Maryland’s Economy
Beyond direct job losses, federal cutbacks are hitting Maryland’s economy in other ways:
- Federal contracts — Both defense and nondefense contracts, which make up 10% of Maryland’s private GDP, face reductions.
- Grant funding — Cuts to federal grants could squeeze local government budgets.
- Medicaid and hospital reimbursements — Lower federal spending on healthcare could strain local health systems.
What’s Next?
Maryland’s local governments face a fiscal storm, with rising costs, federal uncertainty, and proposed state cost shifts straining county budgets. The Blueprint for Maryland’s Future already places significant financial demands on counties, and new fiscal pressures — combined with declining state revenues — threaten to force tough local budget decisions.
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 navigating federal workforce reductions, inflationary pressures, and long-term obligations under the Blueprint, these proposed changes would limit local services, increase fiscal stress, and place more pressure on property taxpayers.
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.
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