Gov. Wes Moore is proposing an income tax hike on the wealthiest 18% of Marylanders — while offering modest tax relief to others — as part of his plans to close a nearly $3 billion gap in the state’s budget.

In his budget proposal unveiled Wednesday, Moore proposed a raft of changes in taxes as well as cuts in spending, marking the starting point of what could be intense negotiations with state lawmakers over the next three months, a key test for the Democratic governor.

Moore described his proposal as focused on making government more efficient and relying on those doing financially well in order to invest in programs that he believes will grow the economy and relieve future financial pressures on the state.

Moore said it’s important for the state to invest in quality schools, safe infrastructure and other priorities, but those things cost money.

“I think being asked to pay a little bit more is something that I’m actually OK with,” Moore said in an interview. “And I believe that a lot of us Marylanders who have done very well and who have really benefited from being a Maryland resident, would agree with me.”

Moore counts himself in the category of Marylanders who would pay more taxes under his plan. He acknowledged he’s done the math, but declined to share how much more he’ll pay.

Under the proposal, the state would establish two new tax brackets. Individual earnings beyond $500,000 would be taxed at 6.25% and earnings above $1 million would be taxed at 6.5%. The state would also add a 1% surcharge on certain capital gains for the next four years.

At the same time, the state would consolidate the lowest four tax brackets and double the standard deduction that earners take on their tax returns, as well as eliminate the option for taxpayers to itemize tax deductions.

Those changes would offer an average benefit of $173 per household, benefitting two-thirds of households, Moore said.

“I do think it’s an important message and statement to the people of the state that we are not going to grow the economy on the backs of working families,” Moore said.

Currently, top earners making at least $750,000 typically pay 9% of their income to state taxes. For those earning less than $30,000, they pay 9.6%, said Helene Grady, Moore’s budget secretary. “Our proposal seeks to level those differences,” she said.

For businesses, in future years there would be a cut in the corporate tax rate from 8.25% to 7.99%, but the state also would institute a reform called “combined reporting” that applies to how companies with subsidiaries calculate their taxes.

With the various tax changes for next year, the state would see a gain of $819 million, Moore administration officials said. That goes a long way to closing the projected nearly $3 billion budget gap.

There also would be other changes Marylanders would see:

• A new 75-cent fee on home deliveries of food and goods from large companies.
• Increased taxes on sports gambling and casino table games.
• An eventual increase in the tax on cannabis to 15% from 9%.
• The state also would eliminate the inheritance tax, as Maryland is a rare state with both an inheritances tax and an estate tax.

The Moore administration is referring to the cuts in planned spending as “cost containment” measures. They include capping participation in the state’s child care subsidy program, slowing expansion of Moore’s service program for young adults, requiring local governments to pay more for various programs that are jointly funded with the state and cutting funding for higher education.

There also would be adjustments to the Blueprint for Maryland’s Future, a multiyear ambitious plan to improve the state’s public schools. As Moore has already indicated, he wants to pause a program to give teachers more out-of-classroom time for planning and training. The state also would freeze grant funding for community schools, which offer additional services to students and their families in high-need areas.

Programs that offer assistance to people with developmental disabilities would see cuts, as would a program that provides grants to victims of crime.

Lawmakers raise concerns

Moore’s proposal is the starting point for negotiations with lawmakers, who have some latitude to cut money and move it around within the budget. They also could propose their own tax or fee changes. Lawmakers’ review will begin in earnest next week.

While Republicans immediately raised concerns, some Democratic leaders urged caution and patience as they begin to unpack the details of Moore’s proposal. Democrats control both chambers of the General Assembly.

Sen. Guy Guzzone, who chairs the Senate’s budgeting committee, said the governor offered a “thoughtful” proposal as a starting point. He said lawmakers will look closely at the proposals, including understanding what the changes may mean to different types of families and businesses.

“I’m going to bet that at the end of the day, you’re going to see a different solution at the end,” the Howard County Democrat said. “But that’s OK, that’s the process.”

Democratic Sen. James Rosapepe, vice chair of the Senate’s budget committee, called Moore’s approach to tax reforms “thoughtful and progressive.”

For Rosapepe, “progressive” means that if you make more money you shouldn’t pay a lesser share in taxes than those who are less wealthy.

“It’s way past time for Maryland to decrease taxes on working families and on small businesses and close tax loopholes and tax breaks for the very wealthy and big corporations,” said Rosapepe, who represents parts of Prince George’s and Anne Arundel counties.

Republicans found some things to like in Moore’s proposal — including cutting costs and investing in economic development programs — but they took a dim view of raising taxes on wealthy Marylanders. They fear the increased taxes could send wealthy residents looking to move to other states.

“The Republicans have said from the very beginning: We’re going to be against anything that raised taxes on individuals,” said Sen. Stephen Hershey, an Eastern Shore Republican who is the Senate minority leader. He’s also concerned that some business owners who pay taxes through their personal income could be the victim of “unintended consequences” from the tax hike.

The House of Delegates minority leader, Del. Jason Buckel, questioned the strategy of giving many Marylanders a relatively modest break of $173 by enacting a tax hike that might drive away entrepreneurs and job creators.

“I’m not crying for the millionaires,” said Buckel, who represents Allegany County. “What I’m telling you is that most of those folks got to positions of success because they’re savvy. They have the ability to make decisions of, if this tax policy begins costing more, more than the value of staying in Maryland, they can pretty easily relocate.”

Advocacy gears up

Nearly as soon as the governor made his remarks, advocacy groups around the state capital began to weigh in.

The Fair Share Maryland coalition has been pushing for years to enact tax reforms, including requiring combined reporting for companies. The coalition said it was pleased some of its ideas are included in the governor’s plan.

“We’re glad that the governor is looking to address at least part of the budget deficit through raising revenues. We really don’t think Marylanders could afford to accept $3 billion in cuts to public services,” said Kali Schumitz, a vice president of the Maryland Center on Economic Policy, a key member of the Fair Share Maryland coalition.

Some business and conservative groups were less excited.

Opportunity Maryland, founded by former Republican Anne Arundel County Council member Jessica Haire said Marylanders oppose increased taxes. “The legislature continues to make promises it can’t afford to keep, driving massive deficits, and now the governor is standing with them expecting taxpayers to bail them out,” Haire said in a statement.

Mike O’Halloran, Maryland state director for the National Federation of Independent Business, said lawmakers should reject tax increases that could hit small businesses.

“Small businesses are the backbone of Maryland’s economy and are managing historic business costs across the board,” he said in a statement. “Now is not the time to saddle Main Street even more by adding to their expenses.”