An overhaul of Maryland’s personal income taxes would give two-thirds of filers an average tax cut of about $173 while raising hundreds of millions of dollars from those making more than $500,000 under a budget plan proposed Wednesday by Gov. Wes Moore.

The shift is aimed at filling a massive state budget deficit and making higher earners pay a closer portion of their total income compared to lower earners. It would coincide with $2 billion in cuts that disproportionately impact funding for the disabled, education and child care scholarships.

The combination would increase spending overall by about 1%. However, it would keep the state’s general fund about $300 million lower than the current budget as officials seek to resolve a $3 billion hole in the next fiscal year.

“Saying, ‘How can we do this, where the majority of Marylanders are actually going to get a tax cut and do it in a way that can still repel and initiate growth, be more efficient in the way that we’re doing our government, more effective in the way we’re doing our government’ — that really kind of became those north stars for me as we were going through the process and as I came to the final decisions,” Moore said in an interview with The Baltimore Sun just before he publicly presented the plan.

How Maryland income taxes would be affected

The tax code changes would consolidate the four lowest income tax brackets at slightly below 4.75% — the current rate for individuals earning up to $100,000 — while adding two higher brackets of 6.25% for those making at least $500,000 and 6.5% for those making more than $1 million. Under current law, the rate maxes out at 5.75% for those making at least $250,000.

About 18% of taxpayers would ultimately pay more, with the majority of nearly $1 billion in new revenue raised in the entire tax package coming from individuals earning at least $700,000.

Officials said the tax cuts would occur by consolidating the lower brackets, doubling the standard deduction and eliminating the ability for itemized deductions. The cut would vary but could be more than $300 for some filers. Nearly two-thirds of filers would receive a tax cut, and 22% would likely see no changes.

Tax increases for sports betting, table games and cannabis

Some individuals could feel the impact of the widespread changes in other ways, though.

Among the additional changes are plans to increase the taxes on sports betting from 15% to 30%, on table games from 20% to 25% and on recreational cannabis from 9% to 15%. Inheritance taxes would also be eliminated, and a 1% surcharge would be applied to capital gains income for households making more than $350,000.

A series of fees proposed simultaneously in the separate transportation budget would also impact vehicle owners and anyone purchasing through online retailers like Amazon.

Lower taxes for businesses

Businesses would also see a lowering of the 8.25% corporate income tax rate starting in the 2028 fiscal year, which the governor said would be possible by expanding corporate taxes in another area — through a method called combined reporting that proponents have long said would eliminate a “loophole” that allows some multi-state businesses to pay lower rates.

Implemented in 28 other states, combined reporting has been debated for decades in Maryland. It would treat all companies operating in the state and its related subsidiaries or associated companies located in the U.S. as one. A more expanded version that includes foreign entities, known as worldwide combined reporting, was part of a package of tax reforms introduced last year and that some Democratic lawmakers and advocates are planning to push again as a more ambitious way to bring in revenue.

The previously proposed reforms, called the Fair Share for Maryland Act, also featured the basic framework of tax cuts for lower earners and increases for higher earners that Moore proposed.

Advocates behind the Fair Share proposal celebrated Moore’s shift on Wednesday while urging him to implement the full plan, which they said would raise more than $600 million in additional funds annually. That would include a more aggressive increase in the upper-income tax brackets — up to 7% for individuals making $1 million rather than Moore’s offer of 6.5%. Moore declined to consider the legislation last year, saying only he maintained a “very high bar” for tax hikes while others warned that cuts would be necessary if taxes weren’t factored in right away.

Asked about his shift a year later and how he decided on the details of his tax package versus those in other proposals, Moore told The Sun he didn’t “want to just take other people’s ideas.”

“We took the ideas and the counsel from a lot of folks,” Moore said in his State House office. “We ran through numbers. We worked with people to get to our solutions, but we knew that the overall solution was not going to be, ‘Take something off of a shelf,’ or, ‘This person’s been proposing this for years.’ It was what makes sense for Maryland in this moment.”

Benjamin Orr, president and CEO of the Maryland Center on Economic Policy that is part of the Fair Share coalition, said the governor’s plan “moves toward righting how we pay for what we value in our state and communities.”

“Maryland’s tax system has been upside down with working families bearing too much of the responsibility for funding public services,” Orr said.

Pausing enrollment in child care program

The budget cuts include pausing enrollment in a state-backed child care program that has ballooned in costs in recent years. Tens of thousands of children have been enrolled in the program, which offers parents money to pay for care at low costs, putting an unanticipated burden on state finances. Officials said they plan to cap enrollment at about 43,000 children, at a total cost of about $400 million to the state.

The list of cuts also includes one of Moore’s top priorities — his signature service year program for recent high school graduates. Expected to double in participants from 500 to 1,000, its growth will be scaled back to 750 for its next class as some of their salaries continue to be paid for by the state.

“It was important to me that we be the first ones to make the tough choices, that we be the first ones to say, let’s look at everything we are doing now,” Moore told The Sun about the initiative that he’s described as his most proud first-year accomplishment.

Changes for education, public safety, workforce and business growth

The governor maintained the state will invest more overall in top priorities like education, public safety, workforce and business growth in a budget that includes $67.3 billion in total spending.

A $550 million increase to reach $9.7 billion in K-12 education spending will coincide with changes to the Blueprint for Maryland’s Future reform plan and cutbacks to aid for public universities. The Blueprint shifts would save $2.5 billion over five years, including $141 million in the next fiscal year, while the public universities would see a smaller amount of new funding than in previous years, about $48 million in a $2.3 billion line item.

Another $750 million will go toward spurring economic growth and $122 million will go toward local aid for police. With health care costs contributing the larger-than-anticipated deficit, Medicaid is set to receive $4.7 billion and the Developmental Disabilities Association, while funded at $1.3 billion, will reflect about $200 million in cuts after a few years of significant growth.

Maryland Budget Secretary Helene Grady said that cutback would keep the program sustainable but is “one of the most difficult proposals in the budget that we’re bringing the General Assembly.”

Lawmakers react

Moore’s announcement is the opening salvo in months of negotiations with the Democratic-controlled legislature. Though many Democrats have backed parts of the plan in the past — including tax increases for the wealthy and cuts for lower earners — lawmakers were still digesting the complex slate of changes Wednesday.

Sen. Guy Guzzone, a Howard County Democrat who is his chamber’s top budget negotiator, said the cuts for disabilities services would likely be a focus for Democrats as they work through that process.

“We have clearly shown, over years, our commitment to that community,” Guzzone said. “The thought that it is a little less than we anticipated is certainly going to cause concern.”

Guzzone declined to comment on the specifics of Moore’s tax reform package but said he appreciated the robust effort and that the final product will likely be different from what was proposed.

“I want to see what it does to this family and that family. We’re going to ask for sample families to look at and try to figure out the true impact to everyone that we can possibly come up with, to really think about how the average, and maybe not even the average, individuals are, how this is going to impact their lives,” Guzzone said.

His counterpart in the House, Prince George’s County Democratic Del. Ben Barnes, also said in a statement that House Democrats appreciated the ideas to raise revenue and not just pass “draconian cuts.”

“The problem before us is one the House saw coming last year and we proposed long-term solutions then,” Barnes said, referring to his caucus’ more urgent push for solutions in 2024. “We are going to work with the governor to uphold our commitment to lower the cost of living for Marylanders.”

Republicans in the minority reacted quickly with concern over the tax hikes while applauding the overall decrease in general fund spending.

“It is encouraging to see that Gov. Moore has made closing the deficit and growing Maryland’s economy a priority,” House Minority Leader Jason Buckel said in a statement. “However, parts of his budget plan may be giving with one hand while taking with the other. I am concerned that the tax increases in his budget may hinder our economic growth and not result in the revenues he anticipates.”

Senate Minority Leader Steve Hershey similarly warned that taxes targeting higher-income individuals could also impact small businesses.

“Generally, those high-earning individuals have the ability to leave the state, to stick to other states with [a] better tax climate,” Hershey said.

Reporter Natalie Jones contributed to this article. Have a news tip? Contact Sam Janesch at sjanesch@baltsun.com, 443-790-1734 and on X as @samjanesch.