2025 End of Session Wrap-Up: State Budget and Fiscal Issues

The segments below provide an overview of MACo’s work on State budget policy in the 2025 General Assembly session. 

County governments depend on a wide range of State-funded programs to deliver essential services. Changes in the State budget — whether in funding formulas, cost sharing, or program structure — can have broad and immediate impacts on county budgets. MACo advocates for predictable funding, protects against unfunded mandates, and supports targeted enhancements that align with local priorities.

Maryland’s 447th legislative session convened amidst a substantial concern over the State’s fiscal situation, with weakened revenues and cost increases for many services at every level of government.

Despite the fiscal limitations, a wide range of policy issues received a full debate, with many resolutions arising from the 90-day annual process. MACo’s legislative committee guided the association’s positions on hundreds of bills, yielding many productive compromises and gains spanning counties’ uniquely broad portfolio.

Follow these links for more coverage on our Conduit Street blog and Legislative Database. 

County governments face increasingly difficult choices as State budget decisions push more obligations onto local governments. MACo’s advocacy in this session focused on protecting local funding tools, preserving vital partnerships, and resisting unfunded mandates that shift the State’s budget burdens onto residents and businesses through local tax increases or service reductions.

This year’s session unfolded against a $3.3 billion projected structural shortfall. Lawmakers adopted a mix of revenue increases, fund transfers, and cost shifts to balance the books. The final $67.9 billion budget and Budget Reconciliation and Financing Act (BRFA) make significant changes — many of which directly affect county budgets.

State Operating Budget

Notable Budget Decisions

Closes Budget Gap — But Pushes the Burden Downward: The State closes its $3.3 billion shortfall through $1.2 billion in new revenues, nearly $2 billion in spending reductions, transfers from other funds — and substantial cost shifts onto county governments. Rather than confronting long-term structural problems with sustainable solutions, the budget leans heavily on local governments to absorb the impact.

Preserves Reserves: The plan maintains $2.1 billion in the Rainy Day Fund (9.4% of general fund revenues), exceeding affordability targets.

Fully Funds Blueprint Formulas: State support for public schools totals $9.8 billion, with $594.4 million in increased direct aid to local school systems — a 7.3% year-over-year increase.

However, in fiscal 2026 alone, counties will provide $1.4 billion more in local funding for public schools than the Blueprint’s mandated local share, according to an analysis by the Department of Legislative Services (DLS).

The State’s funding model has not kept pace with rising costs, leaving counties to fill staggering gaps in critical areas like:

  • Special education – Underfunded by $1 billion annually,
  • Student transportation – Underfunded by $500 million annually.

These gaps are not the result of county decisions but rather a state formula that does not reflect actual school system costs. The economic landscape has changed dramatically since the Blueprint’s enactment — COVID-19 disrupted long-term projections, inflation drove up costs, and federal funding uncertainty continues to loom.

Disparity Grant Enhancement: The budget includes a one-time $17.1 million increase for disparity grant funding, raising the cap from 75% to 90% of the statewide per capita average for five eligible counties already at the current maximum 3.2% local income tax rate: Prince George’s, Wicomico, Somerset, Dorchester, and Caroline.

Reduces General Fund Spending Overall: General fund spending decreases by $400 million — or 1.5% — compared to fiscal 2025. Total expenditures across all fund types increased just 0.1%, reflecting a highly constrained fiscal environment.

Budget Reconciliation and Financing Act (BRFA)

Cost Shifts Partially Mitigated, But Still Burden Local Budgets

While counties avoided the most damaging proposals — including a 100% shift of teacher pension costs — the final BRFA still imposes several significant cost shifts and budget pressures on counties.

What Counties Prevented

  • Full Teacher Pension Cost Shift: DLS recommended a $186 million shift. The final BRFA adopts a partial $97.7 million shift instead.
  • Eliminating State Enterprise Zone Support: Would have cost Baltimore City alone $100 million over 10 years.
  • Diversion of Local POS Funds: Counties retain access to this critical conservation and recreation funding.

Remaining County Cost Shifts

  • Teacher Pension Cost Shift (Partial)

    Counties must absorb $97.7 million in new costs for State-managed teacher pension increases. Local governments still have no control over teacher salaries or retirement policy.

  • SDAT Cost Shift

    Counties must now pay 90% of the State Department of Assessments and Taxation (SDAT) operating costs — a $21.2 million unfunded mandate. This policy change strips objectivity from property assessments and imposes ongoing costs without any local oversight.

  • Teacher Retirement Supplemental Grant Phase-Out

    The BRFA cuts this grant in half for fiscal year 2026 and eliminates it in fiscal year 2027 — a $13.8 million loss that breaks a commitment made during the 2012 pension shift agreement.

  • Nonpublic Special Education Placement Cost Shift

    The BRFA reduces the State’s share of costs from 70% to 60%, shifting $25 million onto local school systems — and ultimately counties, which fund school budgets.

  • Wrongful Incarceration Compensation

    Counties must now fund 50% of new wrongful incarceration settlements approved by the State Board of Public Works — despite having no legal role in convictions, exonerations, or settlement decisions.

Revenue and Tax Policy

Major Overhaul Aims to Stabilize Blueprint and Transportation Funding

The BRFA enacts sweeping tax changes to generate more than $1.2 billion in new annual revenue for the General Fund and $500 million for transportation:

Income Taxes on High Earners

  • New brackets: 6.25% on income between $500,001–$1 million; 6.5% above $1 million

  • Estimated revenue: $344 million

Capital Gains Surcharge

  • 2% surcharge on gains above $350,000

  • Split: 1.25% General Fund, 0.75% Transportation

  • Estimated revenue: $367 million

Sales Tax on Services and Materials

  • 3% tax on data/IT services

  • Eliminates exemptions for advertising materials and high-value collectibles

  • Estimated revenue: $497 million

Industry-Specific and Transportation Fees

  • Tax increases on sports wagering, cannabis, and  short-term car rentals

  • Higher excise tax on vehicle purchases and titling fees

  • New VEIP fee and registration surcharge

  • Estimated revenue: $400–500 million for TTF

Local Income Tax Flexibility

Counties may now increase their local income tax rate from 3.2% to 3.3%, effective for the tax year 2025. This change aligns with MACo’s call for revenue flexibility, though the limited increase cannot itself offset imposed cost shifts onto counties.

Note: The Disparity Grant formula contains a specific “tier” of funding that remains tied to the 3.2% rate threshold. Raising a county’s rate to 3.3% does not affect its Disparity Grant calculation, nor is that step necessary for the county to remain eligible for that funding tier.

Stay tuned to the Conduit Street blog and MACo’s Legislative Database for follow-up analysis and implementation updates as the 2025 session decisions take effect.

Useful Links

Senate Budget Documents

House Budget Documents

Conference Committee Documents

Supplemental Budgets