This article is part of MACo’s Policy Deep Dive series, where expert policy analysts explore and explain the top county policy issues of the day. Read all of MACo’s Policy Deep Dives. 

Counties at or near the maximum local income tax rate face some of the toughest budget pressures in Maryland — from rising education mandates to aging infrastructure and limited flexibility to raise new revenues.

The State created the Disparity Grant to help these jurisdictions close the gap and provide essential services despite a narrower fiscal base.

In the fiscal 2026 budget, lawmakers approved a one-time enhancement to the Disparity Grant, raising the cap from 75% to 90% of the statewide per capita income tax yield — but only for counties already taxing at the maximum 3.2% rate. The enhancement offers short-term relief, but the underlying formula remains volatile, opaque, and structurally flawed.

Here, Conduit Street breaks down how Maryland’s Disparity Grant works, highlights the fiscal 2026 enhancement, and outlines the structural issues that continue to shortchange counties with the greatest need.

No, Counties Don’t Need to Go to 3.3%

With the General Assembly also approving a new local income tax ceiling of 3.3%, questions quickly emerged: Would counties need to adopt the new higher rate to receive full Disparity Grant funding?

The answer is no. The formula still references the current formula rate, not the new maximum authorized by statute. Counties already taxing at 3.2% — and currently receiving the maximum Disparity Grant benefit — will continue to do so under the one-time enhancement without raising rates.

The Comptroller’s Office and legislative staff confirmed this interpretation. The 3.3% change only expands local authority — it does not alter the grant calculation.

While this clarification avoids unnecessary confusion during budget season, it reinforces how complex and opaque the Disparity Grant formula has become.

What the Disparity Grant Is (and Why It Matters)

The Disparity Grant provides noncategorical State aid to counties with limited fiscal capacity — especially those with high income tax rates but below-average per capita yields. It helps ensure that residents in less affluent jurisdictions still receive essential public services, including education, public safety, and infrastructure.

To qualify, a county must:

• Levy a local income tax rate above a minimum threshold
• Fall below a set share of the statewide per capita income tax yield

Counties that meet both criteria — and tax at the maximum allowable rate — receive the highest share of funding, subject to a cap.

But that cap has changed frequently. In recent years, the State imposed artificial limits that dramatically reduced total Disparity Grant payouts — even for fully eligible counties. These restrictions undercut the program’s intent and introduced year-to-year volatility into local budgets.

How the Cap Distorts the Formula

Over the years, the State has significantly altered the Disparity Grant program — shifting it from a purely formula-driven calculation to a patchwork of caps, floors, and statutory minimums. Initially, the program aimed to help less affluent counties with local income tax revenues below 75% of the statewide per capita average generate sufficient resources to deliver essential services.

Because Maryland is one of the few states that allows counties to levy a local income tax, the Disparity Grant serves as a fiscal equalizer, targeting support to jurisdictions with weaker tax bases. However, as the program’s cost began to grow, the General Assembly in 2009 imposed a hard cap that froze each county’s grant at its fiscal 2010 level, regardless of future changes in wealth or population.

This approach quickly proved inadequate. The cap ignored evolving local conditions and locked counties into outdated funding levels, even as their fiscal needs grew.

In response, lawmakers passed a 2013 law that added a minimum funding floor based on a county’s income tax rate — providing 20% of the full grant amount for counties at 2.8%, 40% at 3.0%, and 60% at 3.2%. Later legislation boosted the minimum to 75% for counties taxing at the maximum rate.

This chart shows the Disparity Grant formula calculation for fiscal 2026 under current law — before the one-time enhancement included in the final budget. It illustrates how State-imposed cap/floor provisions significantly limit funding for counties that would otherwise qualify for larger grants.

Overall, cap and floor provisions reduced total fiscal 2026 Disparity Grant funding by more than $50 million — a 22% cut from what the formula would otherwise provide.

The one-time enhancement passed in the 2025 session helps restore some of these reductions. But the chart underscores how the underlying cap structure erodes the program’s effectiveness and predictability.

Counties Have Done Their Part

In recent years, several counties have raised their local income tax rates — many to the maximum — partly to qualify for full Disparity Grant support. But even those counties haven’t received the full benefit.

State-imposed caps have artificially limited funding, reducing grants by hundreds of millions over recent years — including a drop of more than $31 million in fiscal 2025 alone. That year, Prince George’s County alone saw a $29 million reduction due to volatility in the formula, mainly driven by shifts in non-wage income.

Counties have done their part — raising tax rates, meeting the formula’s effort requirements, and building budgets based on eligibility — but the program continues to underdeliver, forcing unpredictable funding swings on jurisdictions that can least afford them.

Temporary Relief Doesn’t Fix a Flawed System

The one-time cap increase to 90% offers welcome short-term relief but leaves the underlying flaws in place. The formula still produces erratic outcomes, with year-to-year swings driven by caps, floor provisions, and volatility in non-wage income.

These unpredictable changes make it difficult for counties to plan responsibly — especially those already operating with limited fiscal flexibility. A single year’s shift can mean the loss of millions in expected revenue, jeopardizing essential services and forcing last-minute budget adjustments.

Without a structural fix, counties will continue to face uncertainty from a program that should offer stability and support.

What Comes Next: Reform Options for 2026

MACo will continue exploring Disparity Grant reform as part of its 2026 legislative initiative development. The goal: Restore the program’s original purpose — providing reliable, equitable funding for counties with genuine fiscal constraints.

Reform concepts under discussion include:

• Three-year averaging to reduce volatility caused by non-wage income swings
• Clearer eligibility standards to minimize confusion about thresholds and rates
• A more stable, transparent formula that counties can count on

Counties at or near the maximum income tax rate face the toughest budget challenges — including steep education mandates and limited flexibility. The Disparity Grant exists to help close that gap. But today, it too often falls short.

The temporary fiscal 2026 enhancement is welcome,  but Maryland will keep penalizing counties that do everything right without structural reform. A more predictable, sustainable funding structure is essential to preserve equitable State support for counties with limited revenue-generating options.

Stay tuned to Conduit Street for more information.

Useful Links

Department of Legislative Services: Disparity Grant Program – Summary of Key Formula Provisions