House, Senate quickly come to agreement on spending and tax plan

House and Senate fiscal leaders reached final agreement Friday on a compromise budget that includes $1.6 billion in annual taxes and ends a one-year experiment with a racing authority tasked with modernizing a storied racetrack and preserving an industry.

The deal reached Friday on a $67 billion total budget comes after two days of negotiations that were less tense than in recent years. The House and Senate each must now vote one final time to approve the deal that is contained in two companion budget bills.

“We made sure our core programs are solid and funded. In the process, we’ve been grownups — a big difference, I think from what you see at the federal level,” said House Appropriations Chair Del. Ben Barnes (D-Prince George’s and Anne Arundel). We know we had to take cuts, and we took about $2 billion in cuts, but we also raised revenues to make sure our core values are protected and funded.”

The overall budget — a figure that includes all state, federal and special revenues — will grow by a little more than 1%. Maryland’s General Fund budget, the smaller portion funded by direct taxes to state residents, decreases by more than $400 million.

Final House and Senate votes could come as early as Saturday. Republicans, who make up the minority of the House and Senate, are expected to oppose the plan but cannot, on their own, prevent Democrats from passing it.

Federal budget actions are triggering

Concerns remain about the potential harm from rampant federal budget cuts and layoffs. The final legislative plan includes a trigger provision that requires a report to lawmakers from the Department of Budget and Management if cuts to federal aid to the state or other reductions reach $1 billion.

“The idea simply is, as we move forward when things may be happening to us from Washington, we’ll be getting prepared and ready to be having discussions and understanding exactly all the impacts,” said Senate Budget and Taxation Chair Sen. Guy Guzzone (D-Howard) to reporters Friday afternoon.

A separate set of trigger provisions remains under negotiation as part of an effort to tame some cost of the state’s Blueprint for Maryland’s Future education reforms.

Cuts, taxes, shifts

Lawmakers and Gov. Wes Moore (D) began the session facing a $3 billion structural deficit.

Moore’s budget as introduced included $2 billion in cuts. Some of those were related to vacant positions. Others merely shifted costs the state paid to local governments. Those shifts included teacher pensions and the costs of property assessments.

Another, added by the legislature, requires local jurisdictions to pick up 50% of any settlement in a case where someone was erroneously convicted.

Other administration cuts to programs, including those for persons with developmental disabilities, were restored by lawmakers — although the ever-shifting budget picture saw Moore this week impose a new $28.8 million in cuts for developmental disability services.

Tech tax tweaks

Among the biggest changes is a new sales tax on information technology and data services. The 3% tech tax is expected to raise nearly $500 million for the state.

On Friday, House and Senate fiscal leaders made several tweaks to the plan.

One amendment made it clear that affiliated companies would not be subject to the tax — a concern some opponents said could exponentially increase costs.

“It was never the intent that that would occur,” said Barnes, adding that the “scoring,” or potential revenue realized from the tax did not include that specific situation.

Another excluded companies in “emerging technology development areas,” specifically the “Discovery District” in College Park. The change exempts companies such as IonQ and companies that do business with a developer of quantum computing technology from the services sales tax. Moore has made the development of quantum computing and other technologies a focal point of his efforts to diversify the state’s economy.

“It certainly matters that it’s the governor’s priority, but it’s all our priority,” Guzzone said.

The changes do not address concerns that the tax would either bankrupt some companies doing federal subcontracting work or force them to move out of Maryland to avoid the tax.

Del. Brian Crosby (D-St. Mary’s), vice chair of the House Economic Matters Committee, said last month that he moved his IT business out of the state rather than lose his company.

House Ways and Means Chair Del. Vanessa Atterbeary (D-Howard) said the change would not affect how the tax is applied to businesses similar to Crosby’s.

The state will also add a 6% sales tax to vending machine purchases.

Lawmakers recast Moore’s tax modernization proposal

Moore’s spending plan included a proposal he said would modernize the state’s income tax system. Under his plan, he created two new tax brackets for high earners beginning at $500,000. The new brackets are expected to generate nearly $344 million annually in new revenue for the state.

The proposal also included a 2% surcharge on capital gains over $350,000. That tax, which would be split between the general fund and the Transportation Trust Fund, is expected to bring in nearly $370 million annually.

As part of the income tax revisions, 94% of Maryland taxpayers will see either no increase or some reduction in their income taxes. The average reduction is expected to be between $50 and $65 annually.

The budget includes a 20% increase in the standard deduction — much lower than the doubling Moore proposed.

Moore also proposed eliminating itemized deductions. The legislature rejected that idea and instead opted for a plan that slowly phases out itemized deductions at $200,000 of taxable income.

The General Assembly also rejected Moore’s proposal to repeal the state inheritance tax. The governor planned to pay for the change with a broader application of the estate tax. Maryland is the only state with both an inheritance and an estate tax.

The compromise agreement also increases the maximum piggyback income tax rate for local governments to 3.3%. The current maximum is 3.2%.

Also increasing are taxes on sports betting and cannabis. The budget includes increasing the tax on sports betting operations in Maryland from 15% to 20%.

The sales tax on recreational cannabis will jump from the current 9% — equal to that assessed on alcohol products — to 15% in July.

Moore’s plan to lower corporate income taxes also died Friday.

The governor proposed lowering the current rate of 8.25% to 7.99%. The reduction was pegged to a requirement to pass combined corporate tax reporting and have it phased in over two years.

The House, in its amended budget plan, added combined reporting but crossed out the corporate tax reduction. The Senate took the House version and nixed combined reporting.

In the end, the two sides agreed to kill both parts of the proposal, leaving the state exactly where it is today.

Racetrack Authority put out to pasture

Lawmakers also agreed to a plan to eliminate the Maryland Thoroughbred Racetrack Operating Authority. The panel was created in 2023. Last year, it consummated a deal with the owners of Pimlico to effectively take over the racecourse, the Preakness Stakes and thoroughbred racing in the state.

Atterbeary said lawmakers “wanted some more oversight and to be able to know and understand what’s going on in real time, which wasn’t happening.”

The budget package eliminates the racetrack authority. In its place, lawmakers will task the Maryland Stadium Authority with overseeing the new training facility and a rebuilt Pimlico Race Track.

Atterbeary said she does not believe the changes made in the budget will delay the work of modernizing Pimlico.

Cash infusion for Transportation Trust Fund

The plan also attempts to bolster the state’s flagging Transportation Trust Fund — a pot of money used to pay for the state’s roads, highways and transit projects.

The two sides had agreed roughly on a target figure of around $400 million annually. They differed on how to get there.

In the end, the House and Senate agreed to a menu of revenues that is estimated to general more than $2.3 billion over five years beginning July 1. That includes an estimated $500 million in fiscal 2026.

Nearly a quarter of that revenue will come from a portion of the new capital gains surcharge. Another $520 million comes from an increase in the costs of titling a vehicle in Maryland.

The two sides also compromised on an increase in the sales tax on a car purchase starting in July. The House initially proposed increasing the tax from 6% to 6.8%. The Senate amended that plan with a tax that phased in over two years to a maximum of 6.5%.

In the end, the two sides landed on a 6.5% sales tax on cars with no phase-in period.

The state will also add a new 3.5% excise tax on rental vehicles. That tax is expected to bring in $240 million.

The state will also pick up $52 million by accelerating the phase-in of higher vehicle registration fees passed last year.

Another $150 million over five years will come from increasing the fees for the state’s Vehicle Emissions Inspection Program. The test, which currently costs $14, will soon cost $30. Late fees face a similar increase.

Republican victory erased in compromise

The House also agreed to accept a Senate plan to add a $5 per tire fee — nearly $110 million over five years— for the trust fund. Republicans in the Senate scored a victory this week in the form of an amendment that earmarked the money for roads and highways.

That victory was short-lived as the Senate gave up the earmark as part of negotiations.

“It will go to the TTF (Transportation Trust Fund) like all transportation funding,” Barnes said.

Maryland Matters is part of States Newsroom, a network of news bureaus supported by grants and a coalition of donors as a 501(c)(3) public charity. Maryland Matters maintains editorial independence. Contact Editor Steve Crane for questions: scrane@marylandmatters.org. Follow Maryland Matters on Facebook and Twitter.