Moody’s: Federal Cuts Put Maryland’s Economy at Greatest Risk

Maryland’s economy faces mounting uncertainty as federal job reductions, contracting cutbacks, and shifting federal priorities threaten to shrink the state’s tax base and strain county budgets.

A new analysis from Moody’s (paywalled) confirmed that no state faces greater risk from federal retrenchment than Maryland.

As previously reported on Conduit Street, with 161,000 federal civilian jobs and another 250,000 Marylanders working in Washington, DC, the state’s economy depends heavily on federal wages. As federal workforce reductions accelerate and contracting slows, the fiscal outlook grows increasingly dire.

A Perfect Storm for Counties

As previously reported on Conduit Street, the March revenue revision from the Board of Revenue Estimates (BRE) slashed income tax revenue projections by $350 million across fiscal 2025 and 2026.

While overall revenue projections dropped by $280 million, the steep decline in personal income tax collections — driven by federal job cuts — is the most alarming factor. Maryland already faced a $3 billion budget shortfall, but weakening wage growth and shrinking taxable income are making matters worse.

Counties, which rely heavily on local income tax revenue, will feel the squeeze:

28,730 federal job losses are projected in Maryland, reducing taxable wages.
Contracting slowdowns could undercut 10% of Maryland’s private-sector GDP.
Shrinking property tax bases could follow, as reduced federal employment weakens home values and commercial real estate.
Higher demand for services will strain local governments that are already managing rising costs.

Unlike Virginia, where federal cuts hit contractors harder than direct employees, Maryland’s high share of federal workers makes the impact on local tax revenues more immediate.

A Familiar — and Worsening — Crisis

Moody’s draws directly compared to 2013 federal sequestration, which slowed Maryland’s labor market and suppressed income tax growth. This time, however, the fallout looks even worse:

Sequestration cut federal discretionary spending by 10.7% — this round could go deeper.
Maryland lost 7,917 federal jobs during sequestration — projections now exceed 28,000.
Contracting cutbacks will hit the biotech, cybersecurity, and life sciences industries that fuel Maryland’s economy.

Counties Face a Quarter-Billion Cost Shift

As federal uncertainty grows, state cost shifts threaten to pile on even more financial pressure.

The Budget Reconciliation and Financing Act (BRFA) of 2025 proposes shifting $250 million in new costs onto county governments.

With two-thirds of Marylanders living in counties at the maximum 3.2% local income tax rate, counties cannot absorb these costs without cutting services or raising property taxes.

What’s Next?

General Assembly leaders continue to delay significant budget decisions as Congress approaches a March 14 deadline for a continuing resolution.

Lawmakers recognize that federal funding decisions, executive actions, and potential agency relocations could drastically reshape Maryland’s fiscal outlook. Given the uncertainty, a special session may be necessary to address budget shortfalls.

Meanwhile, MACo remains focused on protecting local budgets — opposing state cost shifts, advocating for county fiscal flexibility, and ensuring Maryland’s economic uncertainty doesn’t fall squarely on local governments and residents.

Stay tuned to Conduit Street for continued updates.