| STATE OF MARYLAND | POLICY BRIEFING | APRIL 2026 |
Maryland’s Budget Deficit and Gap-Closing Options
The whoe report could be downloaded at
A Fiscal Strategy Briefing for the Governor and the Maryland General Assembly
| $71.3 Billion FY2027 Total Budget | $28.3 Billion FY2027 General Fund | $201 Million FY2027 Closing Cash |
| $2.2 Billion (8%) Rainy Day Fund | $21.1B / 29.7% Federal Funds Share | $598 Million FY2027 Structural Gap |
| Prepared by: Office of Policy Analysis | Data current as of April 2026 | For official use |
Table of Contents
| Executive Summary | 3 |
| Section 1. Why Structural Deficits Matter | 4 |
| Section 2. Fiscal Baseline | 6 |
| 2.1 General Fund Budget Overview | 6 |
| 2.2 Revenue Trends | 7 |
| 2.3 Spending Trends and Major Cost Drivers | 8 |
| 2.4 Reserve Position | 9 |
| Section 3. Deficit Diagnosis | 10 |
| 3.1 Cyclical vs. Structural Components | 10 |
| 3.2 Out-Year Structural Gap | 11 |
| 3.3 Risk Exposures | 12 |
| Section 4. Comparative Analysis with Peer States | 14 |
| Section 5. Policy Options to Close the Gap | 16 |
| Option 1 – Blueprint Cost Management and Phased Sequencing | 16 |
| Option 2 – Medicaid Program Integrity and Managed Care Reform | 17 |
| Option 3 – Targeted Revenue Broadening | 18 |
| Option 4 – Agency Consolidation and Administrative Efficiency | 19 |
| Option 5 – Strategic Reserve Deployment and Debt Restructuring | 20 |
| Option 6 – Economic-Growth-Oriented Tax Competitiveness Reform | 21 |
| Option 7 – Federal Contingency Planning and Grant Diversification | 22 |
| Section 6. Integrated Policy Packages | 23 |
| Package A – Spending-Focused Stabilization | 23 |
| Package B – Balanced Mix | 24 |
| Package C – Structural Reform + Growth | 25 |
| Section 7. Baseline vs. Policy Forecast | 26 |
| Section 8. Prioritization Matrix | 30 |
| Section 9. Final Recommendation | 32 |
| References | 34 |
Executive Summary
| The Bottom Line Maryland’s enacted fiscal 2027 budget is balanced on a cash basis, but it is not in durable structural balance. The Department of Legislative Services (DLS) projects a fiscal 2027 general fund structural shortfall of $598 million, rising to an estimated $2.57 billion in fiscal 2028 and $3.43 billion by fiscal 2030 under current law and current-services assumptions (DLS, 2026 90-Day Report, p. 26). DLS further reports that the structural gap widens sharply beginning in fiscal 2028 because Blueprint costs exceed dedicated Blueprint revenues and require nearly $2.6 billion of general fund support (DLS, 2026 90-Day Report, p. 27). Maryland therefore does not face an immediate cash insolvency problem; it faces a medium-term structural imbalance problem that will intensify quickly if the State relies on one-time balancing actions rather than recurring reforms. |
The immediate fiscal position is tighter than Maryland’s reserve headline suggests. The enacted plan leaves an estimated fiscal 2027 closing cash balance of $201 million, in addition to a $2.2 billion Rainy Day Fund equal to 8.0% of estimated general fund revenues (DLS, 2026 90-Day Report, pp. 12, 26). That reserve posture is still credible, but it does not eliminate the underlying mismatch between ongoing revenues and ongoing spending. The core drivers of that mismatch are Maryland-specific: rising Blueprint and education commitments, Medicaid and disability-service cost growth, continued federal exposure equal to about 29.7% of all spending, and a revenue base tied to slower private-sector growth than several peer states.
Key Findings
- Current structural position: DLS projects a fiscal 2027 structural shortfall of $598 million, even after the 2026 session’s enacted budget actions (DLS, 2026 90-Day Report, p. 26).
- Out-year trajectory: DLS projects the structural deficit to widen to $2.57 billion in fiscal 2028 and $3.43 billion by fiscal 2030 under current law (DLS, 2026 90-Day Report, p. 26).
- Blueprint pressure: DLS states that the gap grows substantially beginning in fiscal 2028 as Blueprint costs exceed Blueprint revenues and require nearly $2.6 billion of general funds (DLS, 2026 90-Day Report, p. 27).
- Federal exposure: Federal funds account for approximately 29.7% of all fiscal 2027 spending, or about $21.1 billion, leaving Maryland unusually exposed to federal budget, grant, and procurement risk (DLS, 2026 90-Day Report, pp. 13, 50).
- Reserve position: The enacted plan meets the Spending Affordability Committee target of an 8.0% Rainy Day Fund balance, with $2.2 billion in the Revenue Stabilization Account and a $201 million closing cash balance (DLS, 2026 90-Day Report, p. 26).
- Gap-closing actions already taken: The 2026 session reduced the fiscal 2027 structural gap by 52% versus the December 2025 projection through $803.1 million in general fund reductions and $132.8 million in additional ongoing general fund revenue (DLS, 2026 90-Day Report, pp. 26, 31).
Top Policy Recommendations
- 1. Blueprint Sequencing Reform: Preserve the statutory framework while slowing or reordering the most fiscally intensive implementation steps beginning in fiscal 2028, when DLS shows the major structural widening begins.
- 2. Medicaid and Human Services Cost Management: Pursue managed-care contracting, eligibility integrity, behavioral-health reimbursement redesign, and disability-service efficiency rather than blunt eligibility cuts.
- 3. Revenue Base Modernization: Broaden selected tax bases and compliance tools instead of relying solely on higher headline rates on an already narrow and mobile base.
- 4. Administrative Consolidation and Procurement Reform: Focus on shared services, overlapping economic-development functions, licensing, and purchasing systems where savings are plausible and recurring.
- 5. Capital and Reserve Smoothing: Use reserve or debt-management tools only as a bridge and only alongside recurring reforms, not as a substitute for them.
- 6. Federal Risk Management: Build a standing fiscal-response process for federal grant, procurement, and workforce shocks given Maryland’s unusually high federal exposure.
- 7. Growth-Oriented Competitiveness Reform: Improve the long-run tax base through targeted business-climate, housing, commercialization, and labor-force actions that complement fiscal repair rather than compete with it.
Expected Results (5-Year Horizon, Package B Baseline)
Table 1. Expected Fiscal and Economic Outcomes Under a Balanced Policy Package
Source: DLS 2026 90-Day Report, pp. 26-27; BLS (2026); Author scenario analysis
► Even under optimistic assumptions, full structural balance requires 4–5 years of sustained action.
| Metric | FY2026 Baseline | FY2028 Policy (1-Yr) | FY2030 Policy (3-Yr) | FY2031 Policy (5-Yr) |
| Structural GF Gap | $598M shortfall | $1.4–2.0B | $0.7–1.4B | Near balance / manageable residual gap |
| Rainy Day Fund Balance | $2.2B (8.0%) | $1.9–2.1B (7%+) | $2.1–2.4B (7.5%+) | $2.3–2.8B (8%+) |
| GF Revenue Growth | 3.0% ongoing revenue growth* | 3.0–4.0%/yr | 3.0–4.0%/yr | 3.0–4.5%/yr |
| Ongoing Spending Growth | 5.8% vs. FY2027 plan* | 3.5–4.5%/yr | 3.0–4.0%/yr | 3.0–4.0%/yr |
| Competitiveness / Credit | AAA maintained; structural risk noted | AAA maintained if reforms enacted | stabilized outlook | stronger medium-term position |
Section 1. Why Structural Deficits Matter
1.1 Cyclical vs. Structural Imbalance: A Critical Distinction
Not all budget gaps are equal. A cyclical shortfall arises when the economy contracts, temporarily depressing tax revenues and lifting demand for social services; it resolves as growth returns. A structural deficit persists even at full employment: it reflects a fundamental mismatch between the spending obligations a state has committed to and the revenue its tax base can sustainably generate. Maryland’s current gap is predominantly structural. DLS explicitly characterizes fiscal 2027 as ending with a structural shortfall of $598 million and fiscal 2028 with a structural deficit of $2.57 billion (DLS, 2026 90-Day Report, p. 26). The Blueprint’s escalating education spending, Medicaid’s trend growth, and other mandated costs do not abate when the economy improves. Revenue growth, meanwhile, is projected to average just 3.0% while ongoing spending grows 5.8% between fiscal 2027 and 2031 (DLS, 2026 90-Day Report, p. 27).
1.2 The Six Harms of Structural Deficits
- Fiscal instability and reserve erosion: A structural deficit steadily draws down reserves, leaving the state exposed to revenue shocks. Maryland’s enacted fiscal 2027 plan leaves only a $201 million closing cash balance in addition to the 8% Rainy Day Fund target, which is adequate for short-term smoothing but not for repeated structural support (DLS, 2026 90-Day Report, p. 26).
- Credit quality pressure: The three major rating agencies (Moody’s, S&P, Fitch) monitor structural balance as a primary credit factor. Maryland’s AAA rating—one of only 14 states to hold this designation as of May 2024—is a direct fiscal asset, saving tens of millions annually in borrowing costs. Persistent structural deficits put that rating at risk.
- Reduced flexibility during downturns or federal cuts: A state entering a recession or federal funding reduction with structural imbalance has no cushion to absorb the shock. Maryland’s 29.7% federal fund dependency ($21.1 billion of $71.3 billion total enacted spending) makes this risk acute: the BRE 60-Day Report on the One Big Beautiful Bill (2026) flags potential federal cuts that could remove billions from Maryland’s budget with little notice.
- Forced abrupt tax hikes or spending cuts: Without structural correction, Maryland will face an annual cycle of crisis-driven budget negotiations—raising taxes on a weakening base or cutting services that local governments, nonprofits, and vulnerable populations depend on.
- Crowding out long-term investment: Capital investment in transportation, broadband, housing, and innovation infrastructure competes directly with structural spending obligations for general fund resources. When deficits dominate the budget conversation, long-term investments are deferred.
- Institutional and political erosion: Recurring structural gaps breed short-termism in budget decisions, incentivize one-time fixes over genuine reform, and erode public and investor confidence in Maryland’s fiscal management.
1.3 Why This Matters Specifically for Maryland
Maryland’s structural deficit is compounded by three Maryland-specific factors that amplify the standard harms:
- Blueprint obligations are statutory, not discretionary. The Blueprint for Maryland’s Future, enacted in 2021, is state law with defined funding schedules. These are not aspirational targets that can be quietly deferred—they carry legal, political, and accountability-board enforcement weight. Any phasing or sequencing strategy requires legislative action and AIB concurrence.
- Federal exposure is uniquely high. With about $21.1 billion in federal funds representing 29.7% of enacted fiscal 2027 spending, Maryland is more exposed to federal fiscal decisions than most peers. Virginia (also high-dependency) benefits from a more diversified private tech sector. Maryland’s exposure is concentrated in health (Medicaid), education (Title I, IDEA), and defense contracting.
- Private-sector growth has been systematically weak. Total nonfarm employment fell 1.9% year-over-year in early 2026, with professional and business services—the highest-wage private sector—down 4.3–4.9%. This directly suppresses income and corporate tax revenues, the core of the general fund. Unlike a cyclical shock, this reflects persistent structural competitiveness deficits that a growing deficit makes worse, not better.
| Policy Implication Maryland cannot deficit-spend its way to growth. The fiscal and economic problems are mutually reinforcing: a structural deficit diverts capital from growth-enabling investment, while weak growth shrinks the tax base that could close the deficit. The policy agenda must address both sides simultaneously. |
Section 2. Fiscal Baseline
2.1 General Fund Budget Overview (FY2026)
The enacted fiscal 2027 Maryland budget totals $71.314 billion across all fund sources. The general fund—the primary vehicle for unrestricted state spending and the central metric for fiscal health analysis—stands at $28.308 billion in appropriations. Federal funds total approximately $21.180 billion, or 29.7% of all spending. These figures come from the enacted budget totals in the 2026 90-Day Report, Exhibit A-1.15 (p. 50).
Table 2. FY2027 Maryland State Budget by Fund Source
Source: DLS, 2026 90-Day Report, Exhibit A-1.15, p. 50
► Federal funds at 29% represent Maryland’s most significant fiscal vulnerability.
| Fund Source | FY2026 Appropriation | Share of Total |
| General Fund | $28.308 billion | 39.7% |
| Federal Funds | $21.180 billion | 29.7% |
| Special / Other Funds | $21.826 billion | 30.6% |
| Total | $71.314 billion | 100.0% |
2.2 Revenue Trends
Maryland’s general fund revenues depend heavily on individual income taxes, sales taxes, general fund), corporate income taxes (≈8%), and sales and use taxes (≈20%). This concentration creates both strength and vulnerability:
- Individual income tax: Maryland’s progressive income tax structure generates high per-capita collections ($3,177 per capita, ranked 4th nationally; Tax Foundation, 2026), but is highly sensitive to employment and income trends among high-earning households. Net domestic out-migration of higher-income taxpayers—documented in IRS migration data and Tax Foundation analysis (2026)—is measurably eroding this base. The top combined state-local marginal rate of up to 9.9% compares unfavorably with Virginia (5.75% flat top rate) and North Carolina (4.75% flat rate as of 2024).
- Corporate income tax: Maryland’s 8.25% corporate income tax rate is among the highest in the mid-Atlantic region and limits business formation and headquarters retention. Virginia levies 6%, North Carolina 2.5% (reduced from 2.25% in 2024), and Pennsylvania 8.49% (in ongoing reduction).
- Sales and use tax: Maryland’s 6% state sales tax applies narrowly. The exclusion of most services—while services now constitute over 70% of consumer spending—significantly constrains the sales tax base relative to economic activity. This structural narrowing suppresses revenue growth below GDP growth in normal years.
- Revenue growth vs. spending growth mismatch: DLS projects ongoing revenues to grow at an average annual rate of 3.0% between fiscal 2027 and 2031, while ongoing spending grows 5.8% over the same period. That differential is the basic arithmetic behind the out-year structural gap (DLS, 2026 90-Day Report, p. 27).
2.3 Major Spending Drivers
The following five categories account for the large majority of general fund spending pressure over the next five years. Absent corrective action, these drivers will collectively consume virtually all projected revenue growth:
Table 3. Major Budget Pressure Points, FY2027 and Out Years
Source: DLS, 2026 90-Day Report, pp. 15, 17, 26-27, 47
► Blueprint education aid and Medicaid together account for the majority of out-year structural pressure.
| Spending Category | FY2026 Estimated Cost | Annual Growth Rate | Notes |
| Blueprint Fund / K-12 aid | > $350M increase in FY2027 | Steep step-up in FY2028 | DLS says Blueprint costs exceed Blueprint revenues and require nearly $2.6B in GF beginning FY2028 |
| Medicaid / health spending | > $225M federal Medicaid increase in FY2027 | Continued upward pressure | DLS also cites $287.6M in GF within $718.3M of DDA/Medicaid-related support for prior-year costs |
| Personnel | $13.18B total funds | Ongoing salary and staffing pressure | 17.7% of total FY2027 State budget (DLS, 2026 90-Day Report, p. 47) |
| Transportation / capital | $1.39B system preservation | Capital affordability pressure persists | DLS indicates transportation goals were met in FY2027 but capital choices remain constrained |
| Other mandated spending | Disability and formula aid growth | Upward out-year pressure | Budget rigidity limits flexibility once revenues soften |
2.4 Reserve Position
The Spending Affordability Committee target for fiscal 2027 required both a closing cash balance of at least $100 million and a Rainy Day Fund balance of at least 8.0% of estimated general fund revenues. The enacted budget meets those tests with a projected $201 million closing cash balance and a $2.2 billion Rainy Day Fund balance (DLS, 2026 90-Day Report, p. 26).
The reserve picture is therefore mixed rather than immediately alarming. Maryland still has usable liquidity, but the small cash balance means the State has limited room to absorb a revenue miss or federal reduction without quickly returning to the legislature or drawing on reserves. In practical terms, the reserve position buys time; it does not solve the structural problem.
Section 3. Deficit Diagnosis
3.1 Cyclical vs. Structural Components
The Maryland structural deficit has both cyclical and structural components. The October–November 2025 federal government shutdown created a temporary drag estimated by BEA at approximately 1.0 percentage point of national real GDP growth in Q4 2025, with disproportionate impact on Maryland due to its federal worker and contractor concentration. This cyclical element will partially self-correct. (BEA GDP Third Estimate, Q4 2025, April 9, 2026)
However, the structural components are larger and more durable. DLS identifies the fiscal 2027 problem explicitly as a structural shortfall and shows the gap widening sharply in fiscal 2028 as Blueprint costs outrun dedicated revenues. The report’s baseline growth assumptions imply that the problem persists even without a recession. In other words, Maryland’s current vulnerability is not mainly that revenues could dip; it is that ongoing commitments are already set to grow faster than ongoing revenues.
Table 4. Maryland Structural vs. Cyclical Deficit Components (FY2026–FY2030)
Source: DLS, 2026 90-Day Report, pp. 26-27; author classification of sourced drivers
► Blueprint becomes the dominant structural pressure once dedicated Blueprint revenues are exhausted.
| Component | FY2026 Gap Estimate | FY2028 Estimate | FY2030 Estimate | Type |
| Blueprint costs above Blueprint revenues | Driver emerges | Nearly $2.6B GF required | Major continuing driver | Structural |
| Medicaid / DDA / behavioral health | Ongoing pressure | Continued upward pressure | Continued upward pressure | Structural |
| Federal grant / procurement exposure | Tail risk | Material risk if federal cuts occur | Material risk if federal cuts persist | Mixed |
| Cyclical revenue weakness | Moderate | May fade with recovery | Uncertain | Cyclical |
| Total structural gap | $598M | $2.57B | $3.43B | — |
3.2 Out-Year Structural Gap Trajectory
Under a current-services baseline—no policy changes, baseline economic growth, full Blueprint implementation on schedule—the structural general fund gap escalates as follows. These ranges reflect scenario uncertainty around federal cuts, revenue performance, and Medicaid caseloads. The lower bound assumes modest federal risk materialization; the upper bound assumes DOGE-level federal spending reductions affecting Maryland’s grant and contract revenues.
Table 5. Out-Year Structural Gap Trajectory (General Fund, Before Gap-Closing Actions)
Source: DLS, 2026 90-Day Report, pp. 26-27; FY2031 author extension based on DLS growth assumptions
► The sourced DLS forecast shows the structural gap widening by more than fivefold from FY2027 to FY2030.
| Fiscal Year | Low Scenario | Mid Scenario (Base) | High Scenario | Key Driver |
| FY2027 | $598M | $598M | $598M | Enacted budget after 2026 session actions |
| FY2028 | $2.57B | $2.57B | $2.57B | Blueprint costs exceed Blueprint revenues |
| FY2029 | $2.9B | $3.1B | $3.4B | Education and health cost growth; author scenario |
| FY2030 | $3.43B | $3.43B | $3.43B | DLS out-year estimate |
| FY2031 | $3.8B | $4.1B | $4.6B | Author extension using DLS revenue/spending growth rates |
3.3 Risk Exposures
Federal Dependency Risk
Federal funds represent approximately $21.1 billion of Maryland’s $71.3 billion enacted fiscal 2027 budget, or 29.7% of all spending (DLS, 2026 90-Day Report, pp. 13, 50). Key federal funding streams at risk include:
- Medicaid federal match (FMAP): Maryland’s federal medical assistance percentage typically covers 50%+ of Medicaid costs. Any FMAP reduction or work requirement that reduces enrollment will shift costs to the state general fund.
- Education grants (Title I, IDEA, Head Start): These together represent several hundred million dollars annually. Federal grant consolidation or block grant conversion could reduce flexibility or total funding.
- Defense and intelligence procurement: Fort Meade, NSA, the Applied Physics Laboratory (APL), and related contractors generate tens of billions in Maryland economic activity and indirect tax revenue. Procurement reductions at these facilities have immediate revenue and employment impacts.
- Research grants (NIH, NSF, NIST): NIH, headquartered in Bethesda, Maryland, is the world’s largest funder of biomedical research and anchors Maryland’s life sciences cluster. FY2025 and early FY2026 reports of NIH grant freezes and headcount reductions threaten the $20+ billion in annual NIH-supported economic activity in Maryland.
Tax Base Erosion Risk
Tax Foundation migration data (2026) documents that Americans are moving to states with lower taxes and more competitive structures. Maryland has experienced consistent net domestic out-migration, primarily to Virginia, Florida, Pennsylvania, and the Carolinas. IRS Statistics of Income data show that Maryland loses a disproportionate share of high-income filers—the same taxpayers who generate the majority of income tax revenue. This creates a self-reinforcing cycle: the high-income taxpayer base shrinks, the remaining base must be taxed at higher rates to maintain revenue, which further accelerates out-migration.
Section 4. Comparative Analysis with Peer States
Peer state comparisons are most useful when they reveal specific lessons Maryland can apply, not when they simply rank states on aggregate indices. The four peer states— Virginia, North Carolina, Pennsylvania, and New Jersey—each offer distinct lessons for Maryland’s fiscal strategy.
Table 6. Maryland Fiscal and Economic Comparison with Peer States
Source: Tax Foundation (2026); BLS (Jan 2026); NASBO Fiscal Survey 2025; BEA Regional Data; Author compilation
► North Carolina’s decade of tax simplification has produced stronger growth and budget resilience.
| Indicator | Maryland | Virginia | North Carolina | Pennsylvania | New Jersey |
| Top State Income Tax Rate | 5.75%* | 5.75% | 4.75% | 3.07% (flat) | 10.75% |
| Corporate Income Tax Rate | 8.25% | 6.00% | 2.50% | 8.49%→4.99% | 9.00% |
| State Tax Competitiveness Rank (2026) | 46th | ~25th | ~10th | ~32nd | ~49th |
| State-Local Tax Burden (% income) | 11.3% | ~9.3% | ~8.9% | ~10.1% | ~13.2% |
| Rainy Day Fund (% of GF) | ~8.8% | ~10–12% | ~15–18% | ~10% | ~5% |
| 2025 Real GDP Growth (est.) | ~1.5–2.0% | ~2.5–3.0% | ~3.5–4.0% | ~2.0–2.5% | ~2.0–2.5% |
| Unemployment Rate (Jan 2026) | 4.3% | ~3.2% | ~3.7% | ~3.9% | ~4.5% |
| Federal Funds Share of Budget | ~29% | ~25% | ~27% | ~32% | ~26% |
| Primary Structural Challenge | Blueprint + federal | Pension growth | Revenue sufficiency | Pension/OPEB legacy | Debt + spending |
* Maryland’s top combined state-local rate reaches up to 9.9% with county income taxes.
4.1 Virginia: The Most Direct Competitor
Virginia’s fiscal position is instructive for Maryland in two ways. First, Virginia carries a structurally similar income-tax-heavy revenue mix but has maintained stronger private-sector job growth (unemployment ~3.2% vs. Maryland’s 4.3%), partly reflecting its more competitive 6% corporate tax rate, less regulatory friction, and lower combined income tax burden at most brackets. Second, Virginia actively competes with Maryland for major corporate headquarters, data centers, and federal-adjacent contractors—Amazon HQ2 and numerous defense tech firms chose Northern Virginia over Maryland in part due to tax and regulatory considerations. Maryland cannot match Virginia on tax rates without significant revenue trade-offs, but can narrow the gap on targeted business investments and regulatory speed.
4.2 North Carolina: A Growth Model with Structural Lessons
North Carolina has undergone the most dramatic fiscal transformation among mid-Atlantic and southeastern peers over the past decade. Beginning with a 6.9% top income tax rate in 2013, North Carolina has reduced its flat rate to 4.75% (with further reductions planned), lowered its corporate tax toward zero by FY2030 under current law, and broadened its sales tax base to offset revenue losses. The result: North Carolina consistently ranks in the top 10 on tax competitiveness, real GDP growth of approximately 3.5–4.0% annually, and a Rainy Day Fund at 15–18% of general fund appropriations. The lesson for Maryland is not to replicate North Carolina’s rate cuts immediately—Maryland’s fiscal position cannot bear that—but to adopt the sequenced approach: broaden first, then reduce rates as the base grows.
4.3 Pennsylvania: A Pension Warning
Pennsylvania‘s fiscal trajectory offers a cautionary example of deferred pension obligations compounding into a structural crisis. Pennsylvania’s pension debt forced a decade of difficult choices between tax increases and service cuts. Maryland’s pension system (estimated 65.7% funded as of FY2024, MSRPS estimates) is healthier than Pennsylvania’s at the onset of its crisis, but the direction matters: insufficient annual contributions today create larger obligations tomorrow. Maryland’s Act 2011 pension reform reduced future accruals, but OPEB liabilities remain large. Pennsylvania’s lesson: address unfunded liabilities before they compound.
4.4 New Jersey: High-Tax Instability
New Jersey represents the path Maryland should avoid. With the highest combined tax burden in the region (13.2% of income), a 9% corporate tax rate, and ranked last or near-last on tax competitiveness, New Jersey has experienced persistent out-migration, structural deficits, and multiple credit downgrades. New Jersey’s repeated reliance on short-term revenue measures (lottery monetization, pension payment deferrals, one-time federal funds) rather than structural reform has left it with minimal fiscal flexibility and a Rainy Day Fund below 5% of general fund. Maryland’s current trajectory—high taxes, growing mandated spending, weak growth, thin reserves—bears more resemblance to New Jersey than Maryland’s policymakers should be comfortable acknowledging.
Section 5. Policy Options to Close the Gap
The following seven policy options span spending restraint, revenue broadening, government operations, reserve management, and growth-oriented reform. Each is analyzed for fiscal effect, structural value, economic impact, and implementation feasibility. Options are presented as distinct and non-repetitive; the integrated packages in Section 6 combine them for maximum cumulative effect.
Option 1. Blueprint Cost Management and Phased Sequencing
Table 7. Option 1: Blueprint Cost Management — Analysis Summary
Source: DLS Education Policy; AIB Blueprint Implementation Reports; MACo County Budget Commentary
| Dimension | Assessment |
| What it is | Negotiate with the Accountability and Implementation Board (AIB) to sequence Blueprint components by readiness and cost-effectiveness, deferring high-cost elements (full teacher salary scale; universal pre-K expansion at planned pace) by 2–3 years while accelerating high-return elements (career and technical education; college prep concentrations; curriculum alignment). |
| Why considered | Blueprint annual incremental costs are projected at $300–500 million per year through FY2030, totaling $2.5–3.2 billion in cumulative general fund obligation above the FY2023 baseline. This is the single largest driver of the structural gap. |
| Fiscal effect (1-yr) | Save $400–700 million in general fund outlays in FY2029 (relative to current schedule, if enacted January 2028). |
| Fiscal effect (3-yr) | Cumulative savings of $1.2–2.0 billion, while preserving the long-term Blueprint framework and statutory commitment. |
| Fiscal effect (5-yr) | Savings of $2.0–3.0 billion vs. baseline; structural gap reduced by 30–45% of the total. |
| Type | Recurring; addresses structural gap directly. |
| Structural value | High. Directly targets the largest structural spending driver. |
| Economic impact | Neutral to modestly negative short-term (slower teacher salary growth); positive long-term if sequencing prioritizes high-return investments. |
| County/local impact | Significant: counties bear 40–50% of Blueprint costs under local share formulas. Sequencing relief flows proportionally to county budgets. MACo has consistently identified Blueprint local cost exposure as a top fiscal concern. |
| Implementation req. | Requires legislative amendment to Blueprint timelines; AIB concurrence; MSDE planning revision. Complex but precedented—AIB has already made phasing adjustments. |
| Political feasibility | Moderate. Faces teacher union and advocacy opposition; however, broad fiscal pressure and county government support may create a coalition for responsible sequencing. |
| Risks & tradeoffs | Risk of being characterized as ‘gutting’ the Blueprint. Must be framed as evidence-based sequencing, not abandonment. International evidence (McKinsey, OECD) supports that teacher quality and curriculum matter more than pace of salary escalation in early reform phases. |
Option 2. Medicaid Program Integrity and Managed Care Reform
Table 8. Option 2: Medicaid Managed Care Reform — Analysis Summary
Source: DHMH Maryland Medicaid Data; CMS Program Integrity Reports; MACPAC Medicaid Analysis
| Dimension | Assessment |
| What it is | Expand value-based payment contracts with Maryland’s Medicaid managed care organizations (MCOs); implement enhanced fraud and abuse detection using data analytics; streamline eligibility redetermination to reduce improper enrollment; and expand integrated care models for dual-eligible (Medicare/Medicaid) populations. |
| Why considered | Medicaid consumes approximately $6.5–7.0 billion (all funds) in FY2026 and grows at 6–7% annually. The GF share (≈50%) means every 1% saved on Medicaid saves approximately $32–35 million in general fund. OIG audits and CMS program integrity reports consistently identify improper payments and care-delivery inefficiencies as addressable. |
| Fiscal effect (1-yr) | $100–200 million GF savings from enhanced integrity and targeted managed care renegotiation. |
| Fiscal effect (3-yr) | $300–500 million cumulative; larger savings from value-based contract maturation. |
| Fiscal effect (5-yr) | $600–900 million cumulative; dual-eligible integration and prevention models reduce acute care utilization. |
| Type | Recurring; grows over time as reforms mature. |
| Structural value | High for long-term Medicaid trend; moderate for near-term gap. |
| Economic impact | Positive: reduces burden on business through employer-sponsored insurance substitution; improves population health and workforce productivity. |
| County/local impact | Mostly positive for counties; improves health outcomes in Baltimore City and rural Eastern Shore where Medicaid enrollment is highest. |
| Implementation req. | DHMH administrative action; CMS waiver amendment for some elements; MCO contract renegotiation. Complex but within existing state authority. |
| Political feasibility | High. Managed care reform and fraud reduction have broad bipartisan support. Politically difficult only if managed care organizations resist. |
| Risks & tradeoffs | Savings estimates are inherently uncertain. Managed care efficiencies may be offset by adverse selection or sicker populations in value-based models. CMS federal policy changes (work requirements) could increase uncompensated care costs if enrollment drops. |
Option 3. Targeted Revenue Broadening
Table 9. Option 3: Targeted Revenue Broadening — Analysis Summary
Source: Tax Foundation (2026); DLS Fiscal Planning; Comptroller BRE Annual Reports
| Dimension | Assessment |
| What it is | Expand Maryland’s 6% sales tax to selected business-to-business services (accounting, legal, IT consulting) and close the digital goods tax gap (streaming, software-as-a-service). Alternatively or additionally: modernize the tobacco and cannabis tax structure and close the limited-liability company pass-through income tax gap identified in DLS fiscal reviews. |
| Why considered | Maryland’s sales tax base has structurally narrowed as the economy shifted to services. Over 30 states tax at least some services. A 6% tax on business services generates significant revenue while distributing burden across the business community rather than households. The digital goods gap is estimated at $200–400 million annually in foregone revenue. |
| Fiscal effect (1-yr) | $300–500 million in new recurring GF revenue. |
| Fiscal effect (3-yr) | $900M–1.5B cumulative. |
| Fiscal effect (5-yr) | $1.5–2.5B cumulative; revenue grows with economic activity. |
| Type | Recurring; structurally broadens the tax base. |
| Structural value | High; the most durable revenue option available. |
| Economic impact | Moderate negative for business-service intensive sectors. Tax Foundation’s analysis (2026) suggests sales tax base broadening has smaller economic efficiency costs than rate increases on income. Risk: business location decisions if Virginia does not adopt similar taxes. |
| County/local impact | Positive: additional revenue supports county-shared revenues and reduces pressure on local property taxes. |
| Implementation req. | Legislative action; Comptroller regulatory guidance; 2–3 year phase-in recommended to allow business adjustment. |
| Political feasibility | Moderate. Business community will oppose; however, framing as ‘modernization’ rather than ‘new taxes’ and pairing with modest rate adjustments can build a coalition. Six states adopted service tax expansions between 2020–2025. |
| Risks & tradeoffs | Virginia’s non-adoption creates competitive pressure for professional services firms. Risk of business relocation is real but modest for in-state service providers. Must be paired with a competitiveness offset (see Option 6). |
Option 4. Agency Consolidation and Administrative Efficiency
Table 10. Option 4: Agency Consolidation and Administrative Efficiency — Analysis Summary
Source: DBM Efficiency Review (2023); DLS Analysis of the Maryland Executive Budget; Pew Charitable Trusts (2024)
| Dimension | Assessment |
| What it is | Conduct a systematic review of Maryland’s 77+ cabinet and independent state agencies to identify consolidation opportunities, shared-services migrations, and duplication. Priority targets: overlapping economic development functions (Commerce, MEDCO, TEDCO, CASA, DBED remnants); licensing boards; and information technology procurement across agencies. |
| Why considered | Maryland operates one of the larger state agency structures in the mid-Atlantic relative to population size. Administrative overhead, duplicated back-office functions, and siloed IT systems cost hundreds of millions annually above efficient-scale benchmarks. A 2023 DBM efficiency review identified $150–250 million in near-term administrative savings without service cuts. |
| Fiscal effect (1-yr) | $80–150 million in administrative savings (position attrition, IT consolidation, procurement renegotiation). |
| Fiscal effect (3-yr) | $250–400 million cumulative. |
| Fiscal effect (5-yr) | $400–700 million cumulative; larger IT and shared-service savings materialize. |
| Type | Recurring, though front-loaded with one-time transition costs. |
| Structural value | Moderate. Administrative savings alone cannot close the gap, but improve government effectiveness and fiscal credibility. |
| Economic impact | Neutral to positive; more efficient government reduces business compliance costs and improves service delivery speed. |
| County/local impact | Mixed. Some county-administered state programs benefit from clearer agency mandates; some county pass-through funding may be affected by renegotiated state-agency contracts. |
| Implementation req. | Governor’s executive authority for most agency restructuring; legislative action for statutes defining certain board/commission functions; 12–24 months to achieve meaningful savings. |
| Political feasibility | Moderate. State employee unions will resist headcount reductions; but framing around service improvement and position attrition (rather than layoffs) reduces opposition. |
| Risks & tradeoffs | Transition costs can temporarily increase spending. Savings estimates from efficiency reviews are often optimistic; apply a 60–70% confidence discount to gross estimates. Do not project large savings without confirmed plans. |
Option 5. Strategic Reserve Deployment and Debt Restructuring
Table 11. Option 5: Strategic Reserve Deployment — Analysis Summary
Source: DLS Spending Affordability Committee; NASBO Fiscal Survey 2025; Moody’s Maryland Rating Reports
| Dimension | Assessment |
| What it is | Authorize a time-limited draw of up to $500 million from the Rainy Day Fund to bridge the structural gap while structural reforms take effect—conditioned on concurrent enactment of at least $1.5 billion in recurring gap-closing measures. Simultaneously, restructure the capital debt service schedule to shift near-term payments and reduce general fund pressure by $100–200 million in FY2028–FY2029. |
| Why considered | The Rainy Day Fund exists precisely to smooth structural transitions. A one-time bridge is prudent if—and only if—it is paired with structural solutions. Without the conditionality, reserve use merely defers the problem. The Spending Affordability Committee and DLS have both cautioned against reserve drawdowns absent structural reform. |
| Fiscal effect (1-yr) | $500–700 million in near-term general fund relief (reserve draw + debt restructuring). |
| Fiscal effect (3-yr) | Bridge exhausted; must be replaced by structural savings from Options 1–4. Net effect depends on reform enactment. |
| Fiscal effect (5-yr) | Neutral if structural measures are enacted; negative if used as a substitute for reform. |
| Type | One-time bridge; not a structural solution. |
| Structural value | Low on its own; High as a complement to structural reform. |
| Economic impact | Positive short-term (avoids abrupt cuts); neutral to negative if overused (signals fiscal weakness to rating agencies). |
| County/local impact | Positive: prevents abrupt cuts to state aid that counties depend on for school and health funding. |
| Implementation req. | Legislative appropriation with conditionality language; replenishment plan required within 3 years by statute. |
| Political feasibility | High. Reserve use in a genuine structural crisis has bipartisan support; the key is the conditionality requirement. |
| Risks & tradeoffs | If structural reforms are not enacted simultaneously, reserve draw depletes fiscal cushion and triggers credit concern. Moody’s and S&P have noted Maryland’s thin operating margin; a large reserve draw without structural action would increase AAA rating downgrade risk. |
Option 6. Tax Competitiveness Reform for High-Income Earners
Table 12. Option 6: Tax Competitiveness Reform — Analysis Summary
Source: Tax Foundation (2026); IRS Statistics of Income Migration Data; Comptroller BRE
| Dimension | Assessment |
| What it is | Raise the income threshold at which Maryland’s top combined state-local marginal rate (up to 9.9%) applies; reduce or rationalize the marginal rate schedule above $500,000 in taxable income; and eliminate the estate/inheritance tax on estates below $10 million. Pair with the revenue broadening in Option 3 to maintain overall revenue neutrality or modest net gain. |
| Why considered | Maryland’s combined 9.9% top rate is among the highest in the eastern US. Tax Foundation migration data (2026) confirms that net out-migration of high-income earners to Florida, Virginia, and the Carolinas has been persistent and income-tax-rate sensitive. Maryland also has both an estate tax ($5M threshold) and an inheritance tax—one of only a small number of states to levy both—which accelerates the exit of retirees and wealth holders. |
| Fiscal effect (1-yr) | Near-term revenue cost of $200–350 million GF from rate reduction and estate threshold increase. |
| Fiscal effect (3-yr) | Revenue impact narrows as retention effects materialize; net cost $300–500 million cumulative but partially offset by reduced out-migration. |
| Fiscal effect (5-yr) | If paired with base broadening (Option 3), near revenue neutrality or modest net positive as retained taxpayers generate income, sales, and capital gains tax through economic activity. |
| Type | Recurring; long-term structural improvement to competitiveness. |
| Structural value | High for long-term tax base strength; near-term cost. |
| Economic impact | Positive: reduces incentive for high-income household departure; encourages business formation and headquarters retention; reduces capital exit. |
| County/local impact | Mixed short-term (county piggyback rates affected); positive long-term as high-income retention improves county tax bases. |
| Implementation req. | Legislative action; Comptroller regulatory updates; requires concurrent base broadening to maintain revenue adequacy. |
| Political feasibility | Difficult. Opposition from progressive caucus viewing this as a tax cut for the wealthy. Must be framed in terms of net-revenue and competitiveness evidence, paired with base broadening, and focused on rate thresholds rather than absolute rate cuts. |
| Risks & tradeoffs | Behavioral response (retention effect) takes 3–5 years to fully materialize. Near-term revenue cost is certain; long-term benefit is probabilistic. This option should not be adopted without concurrent base broadening. |
Option 7. Federal Contingency Planning and Grant Diversification
Table 13. Option 7: Federal Contingency Planning — Analysis Summary
Source: BRE 60-Day Report (2026); DBM; NASBO Federal Funds Report; Maryland Comptroller
| Dimension | Assessment |
| What it is | Establish a Federal Funding Risk Office within DBM/BRE to provide real-time monitoring of federal grant and contract exposure; require agencies to develop 12-month contingency plans for a 10% federal funding reduction; and accelerate the diversification of federally dependent programs (particularly Medicaid administration, NIH-linked research, and DSHA housing programs) toward state-funded or private-partnership models. |
| Why considered | With $19.5 billion in federal funds at stake and active federal budget reduction efforts under DOGE and related initiatives, Maryland is uniquely exposed. The BRE 60-Day Report (2026) on the One Big Beautiful Bill highlights potential Maryland-specific federal spending impacts in the multi-billion-dollar range. No state agency currently has a formal federal-contingency planning mandate. |
| Fiscal effect (1-yr) | Minimal direct savings; avoidance of unplanned mid-year cuts worth $200–500 million if federal reductions materialize. |
| Fiscal effect (3-yr) | Contingency diversification reduces federal dependency by an estimated 3–5 percentage points; avoidance value $500 million–$1 billion over the period. |
| Fiscal effect (5-yr) | Structural reduction in federal dependency from 29% to 24–26% of total budget is achievable; avoidance value depends on actual federal policy trajectory. |
| Type | Operational/administrative; recurring benefit. |
| Structural value | Moderate-High. Reduces a major tail risk to the fiscal baseline. |
| Economic impact | Positive: diversification of research and housing funding reduces volatility in key sectors; NIH anchor role can be strengthened through state research-matching programs. |
| County/local impact | Significant positive for Baltimore City and surrounding counties where federal grant dependency is highest in social services and housing. |
| Implementation req. | Executive order plus legislative appropriation for Risk Office ($5–10 million/yr); no statutory barrier; 6-month implementation timeline. |
| Political feasibility | High. Risk management framing has strong bipartisan support; it does not require new taxes or spending cuts. |
| Risks & tradeoffs | Diversification may require higher state spending to replace federal programs. The goal is managed reduction, not abrupt elimination. Maryland’s research institutions depend on federal funding; diversification must be careful not to reduce R&D investment that anchors the innovation economy. |
Section 6. Integrated Policy Packages
The seven options in Section 5 are most effective when combined into coherent packages that address spending, revenue, and operations simultaneously. Three packages are presented below—Spending-Focused (Package A), Balanced Mix (Package B), and Structural Reform + Growth (Package C)—each reflecting a different political and fiscal strategy.
Table 14. Comparison of Three Integrated Policy Packages
Source: Author analysis; based on DLS fiscal projections and peer-state experience
► Package B is the most balanced and most likely to achieve durable fiscal stabilization.
| Dimension | Package A (Spending-Focused) | Package B (Balanced Mix) | Package C (Structural Reform + Growth) |
| Primary mechanisms | Blueprint sequencing + Medicaid reform + Admin efficiency | Options 1–4 + partial reserve bridge | Options 1, 3, 4, 6 + Option 7 + growth incentives |
| Est. 1-yr gap closure (FY2029) | $1.0–1.5B | $1.4–2.0B | $0.8–1.3B |
| Est. 3-yr gap closure (FY2031) | $2.0–3.0B | $2.5–3.5B | $2.0–3.5B |
| Est. 5-yr gap closure (FY2033) | $3.0–4.5B | $3.5–5.0B | $4.0–6.0B |
| Deficit closure (share of gap) | 40–60% | 55–75% | 60–85% (FY2033) |
| Timing of fiscal relief | Fastest (FY2029) | Moderate (FY2029–2030) | Slowest early; strongest long-term |
| Growth effects | Neutral | Slightly positive | Significantly positive |
| Service implications | Moderate cuts to programs | Minimal cuts if well-designed | Mixed; targeted reforms |
| Revenue changes | Minimal | Moderate broadening | Significant restructuring |
| Implementation risk | Moderate | Moderate-High | High |
| Political risk | Moderate (teacher unions, counties) | Moderate | High (broad stakeholder opposition) |
Package A: Spending-Focused Stabilization
Package A relies primarily on spending restraint: phased Blueprint sequencing (Option 1), Medicaid managed care reform (Option 2), and agency consolidation (Option 4), with limited reserve use (Option 5, capped at $250 million) and no new taxes. This package is the most politically viable in the near term, as it avoids new revenue measures. However, it faces implementation risk because the spending savings—particularly from Blueprint phasing—require legislative action and AIB concurrence. If savings targets are not met, the package delivers only $600–900 million in year one instead of the projected $1.0–1.5 billion.
Service implications: Package A requires restraint in K-12 education expansion pace, Medicaid provider rate growth, and state agency headcount. Counties will experience slower state aid growth, increasing pressure on local property tax rates. Without a revenue component, Package A does not improve Maryland’s tax competitiveness and leaves the structural revenue weakness unaddressed.
Package B: Balanced Mix (Recommended Baseline)
Package B combines Blueprint sequencing (Option 1), Medicaid reform (Option 2), targeted revenue broadening (Option 3), administrative efficiency (Option 4), a limited reserve bridge (Option 5, capped at $400 million with conditionality), and federal contingency planning (Option 7). This package addresses the deficit from both sides—spending and revenue—and builds institutional resilience. Estimated gap closure of 55–75% over five years, assuming full enactment by January 2028, is the most realistic achievable scenario under current political and economic conditions.
Package B is the primary basis for the Baseline vs. Policy Forecast in Section 7. It is recommended as the foundation for FY2028 budget planning.
Package C: Structural Reform + Growth
Package C is the most ambitious and highest-risk option. It combines all seven options, including the tax competitiveness reform (Option 6), and requires concurrent base broadening and rate rationalization. Package C is most likely to produce durable long-term fiscal balance and improved economic performance, but its implementation risk is highest: it requires legislative supermajority support, business and advocacy coalition-building, and sustained multi-year execution. For a state facing a near-term crisis, Package C’s slow near-term payoff is a significant drawback; however, its long-term economic and fiscal dividends are substantially larger than Package A or B.
Section 7. Baseline vs. Policy Forecast
The following projections assume Package B is enacted in January 2028, with implementation of Blueprint phasing (Option 1), Medicaid reform (Option 2), revenue broadening (Option 3), and administrative efficiency (Option 4) beginning in FY2028. Reserve bridge (Option 5) is deployed in FY2028–FY2029. Federal contingency planning (Option 7) begins immediately upon enactment. All estimates are directional ranges; avoiding false precision is intentional.
| Projection Assumptions and Limitations Baseline uses the enacted DLS structural-gap outlook where available: $598 million in fiscal 2027, $2.57 billion in fiscal 2028, and $3.43 billion in fiscal 2030. For years beyond the published DLS table, this report uses scenario ranges built from DLS’s statement that ongoing revenues grow about 3.0% annually while ongoing spending grows 5.8% from fiscal 2027 through 2031 (DLS, 2026 90-Day Report, p. 27). Policy scenario assumes all Package B measures are enacted by January 2028 and implemented with moderate success. Federal funding changes are treated as a risk range, not a point estimate. Projections extend only 5 years (FY2033) due to compounding uncertainty beyond that horizon. |
7.1 General Fund Structural Gap
Table 15. General Fund Structural Gap: Baseline vs. Package B Policy Scenario
Source: DLS, 2026 90-Day Report, pp. 26-27; author scenario analysis for FY2029-FY2033
► Package B is modeled as materially reducing, but not automatically eliminating, the structural gap within five years.
| Fiscal Year | Baseline Gap (Low–High) | Policy Scenario Gap (Low–High) | Improvement vs. Baseline |
| FY2027 (current enacted) | $598M | $598M | — pre-enactment |
| FY2028 (enactment year) | $2.57B | $2.1–2.4B | $0.2–0.5B improvement |
| FY2029 (yr 1 policy) | $2.9–3.4B | $1.9–2.6B | $0.8–1.4B improvement |
| FY2031 (yr 3 policy) | $3.8–4.6B | $1.4–2.4B | $2.0–2.7B improvement |
| FY2033 (yr 5 policy) | $4.4–5.5B | $0.8–1.8B | $3.0–4.2B improvement |
7.2 Reserve Position
Table 16. Reserve Position: Baseline vs. Policy Scenario
Source: DLS, 2026 90-Day Report, pp. 12, 26, 28; author scenario analysis
► * Includes $400M reserve bridge draw in FY2028; replenishment begins FY2030.
| Fiscal Year | Rainy Day Fund (Baseline) | Rainy Day Fund (Policy) | GF Closing Balance (Baseline) | GF Closing Balance (Policy) |
| FY2027 | $2.2B (8.0%) | $2.2B (8.0%) | $201M | $201M |
| FY2028 | $1.9–2.1B (6.8–7.5%) | $1.8–2.0B (6.5–7.2%)* | $50–150M | $150–350M |
| FY2030 | $1.4–1.9B (5–7%) | $1.9–2.3B (7%+) | Minimal | $250–600M |
| FY2033 | $0.9–1.5B (3–5%) | $2.1–2.7B (7.5%+) | Persistent pressure | $300–800M |
Under the baseline (no major policy change), Maryland can preserve reserves for a time, but doing so becomes increasingly difficult as the structural gap widens after fiscal 2028. Under Package B, the reserve is used more explicitly as a smoothing device while recurring measures are phased in, improving the odds that the State maintains an investment-grade reserve posture rather than drifting into serial one-time balancing.
7.3 Revenue Trajectory
Table 17. General Fund Revenue Trajectory: Baseline vs. Policy Scenario
Source: DLS, 2026 90-Day Report, p. 27; author indexed scenario analysis
► * Policy uplift in FY2028 reflects revenue-base broadening and compliance measures under Option 3.
| Fiscal Year | GF Revenue (Baseline) | GF Revenue (Policy) | Revenue Growth (Baseline) | Revenue Growth (Policy) |
| FY2027 | Indexed at 100 | Indexed at 100 | — | — |
| FY2028 | 103 | 104-105 | ~3.0% | ~4.0-5.0%* |
| FY2030 | 109 | 113-116 | ~3.0% | ~3.5-4.5% |
| FY2033 | 119 | 127-134 | ~3.0% | ~3.5-4.5% |
7.4 Employment and Wages
Table 18. Employment Outlook: Baseline vs. Policy Scenario
Source: BLS Maryland Economy at a Glance (Jan 2026); Author projections
► Policy scenario improvements are driven primarily by tax competitiveness and federal-contingency stabilization.
| Indicator | FY2026 Current | FY2028 Baseline | FY2028 Policy | FY2030 Policy | FY2033 Policy |
| Total Nonfarm Employment (000s) | ~2,789 | ~2,740–2,780 | ~2,790–2,830 | ~2,870–2,940 | ~3,000–3,080 |
| 12-mo Employment Change | (1.9%) | (0.5–1.0%) | 0.5–1.0% | 1.5–2.0% | 2.0–2.5% |
| Unemployment Rate | 4.3% | 4.0–4.5% | 3.8–4.2% | 3.5–4.0% | 3.2–3.7% |
| Private Sector Wage Growth (est.) | ~2.0% | ~2.5% | ~3.0% | ~3.5% | ~4.0% |
7.5 Competitiveness and Business Activity
Under the baseline, Maryland’s 46th-place tax competitiveness ranking (Tax Foundation 2026 State Tax Competitiveness Index) remains unchanged or deteriorates as other states continue reforming their tax structures. Net domestic out-migration of high-income households persists, with an estimated net loss of 5,000–8,000 high-income filers annually. Business formation rates remain below pre-2017 levels.
Under Package B (with Option 6 added in Package C), Maryland’s competitiveness ranking could improve to the 35th–40th range by FY2030, driven by base broadening (which is competitively neutral or positive), administrative efficiency (which reduces effective compliance costs), and federal-contingency stabilization (which reduces business and investor uncertainty). Net out-migration slows to 2,000–4,000 high-income filers annually by FY2030. Business formation rates return to 2016–2018 trend levels.
7.6 County and Local Fiscal Effects
Maryland’s counties and Baltimore City are directly affected by the state deficit through three channels: (1) state aid levels for education and health, (2) county income tax piggyback revenues, and (3) Blueprint local cost-share obligations.
County effects are directionally clear even where precise out-year amounts vary. DLS and county fiscal commentary indicate that local governments face modest revenue growth alongside rising cost pressure from state policy choices, federal reductions, and Blueprint-related obligations. Under the baseline, those pressures increase reliance on local property tax and fee decisions. Under Package B, Blueprint sequencing and better state fiscal alignment reduce the likelihood that the State pushes adjustment costs disproportionately onto counties.
Section 8. Prioritization Matrix
The matrix below ranks the seven policy options by expected fiscal impact and implementation feasibility, distinguishing near-term wins, medium-term reforms, and long-term structural shifts. Impact scores reflect estimated recurring annual fiscal value at year 3. Feasibility scores reflect political, administrative, and legal complexity.
Table 19. Policy Option Prioritization Matrix
Source: Author assessment; DLS fiscal projections; peer-state benchmarks
► Options 2 (Medicaid), 1 (Blueprint), and 7 (Federal Contingency) offer the best composite scores.
| Option | Category | Est. Recurring Value (Yr 3) | Impact Score (1–10) | Feasibility Score (1–10) | Composite (Impact × Feas.) | Timeline | Priority |
| 1. Blueprint Phasing | Spending | $600M–$1.0B/yr | 9 | 6 | 54 | Medium-term | ★★★★★ |
| 2. Medicaid Reform | Spending | $300–500M/yr | 7 | 8 | 56 | Near-term | ★★★★★ |
| 3. Revenue Broadening | Revenue | $400–600M/yr | 8 | 6 | 48 | Medium-term | ★★★★ |
| 4. Agency Consolidation | Operations | $150–300M/yr | 5 | 7 | 35 | Near-term | ★★★ |
| 5. Reserve Bridge | Bridge | $400–700M one-time | 4 | 9 | 36 | Near-term | ★★★ |
| 6. Tax Competitiveness | Revenue/Growth | Net cost near-term; +$200–400M/yr yr5+ | 8 (long-term) | 4 | 32 | Long-term | ★★★ |
| 7. Federal Contingency | Risk Mgmt | $200–500M avoidance | 6 | 9 | 54 | Near-term | ★★★★★ |
8.1 Near-Term Wins (FY2027–FY2028)
- Option 2 (Medicaid Reform): Highest composite score; within existing state authority; bipartisan; first savings visible in 12–18 months.
- Option 7 (Federal Contingency Planning): Lowest cost to implement; highest political feasibility; risk-avoidance value is substantial given current federal environment.
- Option 4 (Agency Consolidation): First tranche of savings via attrition and IT rationalization achievable within 18 months.
- Option 5 (Reserve Bridge): Deploy in FY2028–FY2029 only if concurrent structural reforms are enacted; treat as a bridge, not a solution.
8.2 Medium-Term Reforms (FY2028–FY2030)
- Option 1 (Blueprint Phasing): Largest single savings opportunity; requires legislative action and AIB engagement; most impactful medium-term measure.
- Option 3 (Revenue Broadening): Requires careful design and phase-in to avoid competitiveness harm; recommended paired with Option 6 preparation.
8.3 Long-Term Structural Shifts (FY2030+)
- Option 6 (Tax Competitiveness Reform): Most transformative for long-run growth and tax base quality; requires political will and concurrent base broadening. Begin design in FY2027 legislative session.
| Summary Ranking for Policymakers If forced to choose three immediate priorities: (1) Begin Medicaid managed care reform immediately—highest near-term impact, lowest political risk. (2) Establish the Federal Funding Risk Office immediately—free option against a major risk. (3) Introduce Blueprint phasing legislation in FY2027 session—the most consequential medium-term action, with the largest structural value. |
Section 9. Final Recommendation
9.1 Core Strategic Judgment
Maryland’s structural deficit is real, growing, and dangerous. It is not primarily a revenue problem or a spending problem in isolation—it is a structural alignment problem: spending obligations were designed and enacted under assumptions about economic growth and federal support that have not materialized. Closing the gap requires action on both sides, structured over a realistic 4–5 year reform timeline, with near-term bridging measures to prevent service disruption.
The most important policy insight from the analysis is this: actions that improve Maryland’s long-run economic growth rate are worth significantly more than equivalent one-time savings, because they permanently expand the tax base on which all future budgets depend. Exact Maryland yield estimates are uncertain, but the policy direction is not: a broader and faster-growing private tax base reduces the need for repeated rate increases or emergency cuts. Growth and fiscal repair are not in tension; they are the same strategy pursued from different angles.
9.2 Recommended Action Sequence
Table 20. Recommended Action Sequence
Source: Author recommendation; DLS; DBM
► Speed matters because DLS shows the structural gap widening sharply beginning in fiscal 2028.
| Timeline | Action | Lead | Expected Fiscal Value |
| Immediately (2026) | Establish Federal Funding Risk Office | DBM / BRE | Risk avoidance; $0 direct cost |
| Immediately (2026) | Begin Medicaid MCO renegotiation and integrity program | DHMH / DBM | $100–150M GF yr 1 |
| FY2027 Legislative Session | Introduce Blueprint phasing legislation | Governor / MGA | $400–700M GF by FY2029 |
| FY2027 Legislative Session | Introduce revenue broadening proposal (digital goods + select services) | Governor / Comptroller | $300–500M GF by FY2029 |
| FY2027–2028 | Agency consolidation and IT shared services plan | DBM / DoIT | $80–150M GF by FY2029 |
| FY2028 (if needed) | Reserve bridge draw, conditioned on legislative enactment of recurring measures | BdPW / MGA | One-time: $300–400M |
| FY2028–2029 | Begin design of tax competitiveness reform for FY2030 enactment | Governor / Comptroller / MGA | Long-term: +$200–400M/yr by FY2033 |
9.3 Conditions for Success
- Political discipline: The structural deficit cannot be closed without some combination of restrained spending growth and new revenues. Any package that relies exclusively on one side is either fiscally inadequate or politically unsustainable.
- Institutional credibility: The BRE, DLS, and AIB must all be involved in the annual validation of savings and revenue projections. One-time measures must be clearly labeled as such; recurring measures must be confirmed as such. The General Assembly’s Budget Committees should require annual structural-balance reporting.
- Reserve protection: The Rainy Day Fund draw in Option 5 must be conditioned on concurrent enactment of recurring gap-closing measures. The Board of Public Works and the Spending Affordability Committee should have joint oversight of the conditionality.
- Economic growth as a co-equal priority: No fiscal repair plan will succeed if Maryland’s private-sector employment continues to contract. The Governor should treat business climate reform, innovation ecosystem investment, and federal-contingency planning as fiscal strategies, not merely economic development aspirations.
- County partnership: MACo and county governments must be partners in Blueprint phasing and Medicaid reform—not adversaries. The local fiscal impact of state decisions is large enough that county opposition to reforms can derail the legislative agenda.
9.4 The Cost of Inaction
| What Happens If Nothing Changes Under the current-services baseline—no major policy reforms, Blueprint on schedule, federal funding at current levels—the DLS forecast already shows the structural shortfall rising from $598 million in fiscal 2027 to $2.57 billion in fiscal 2028 and $3.43 billion by fiscal 2030. Beyond that point, the most plausible baseline is continued widening pressure, heavier reliance on one-time actions, and growing conflict over whether to cut services, raise taxes, slow Blueprint implementation, or push costs to counties. The precise endpoint depends on economic growth and federal policy, so this report does not present a false-precision worst case. But the direction of risk is clear and documented: without recurring reforms, the State’s room for maneuver narrows quickly. The choices before the Governor and General Assembly are consequential and time-sensitive. |
References
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18. Maryland county fiscal materials, 2026. County Revenue Outlook: Fiscal 2026. Used for local fiscal-capacity context and county exposure to state and federal cost shifts.
19. Maryland Department of Budget and Management (DBM), 2025–2026. FY2027 Governor’s Budget Highlights and FY2027 Supplemental Budget Materials. Available at: dbm.maryland.gov
20. Maryland Accountability and Implementation Board (AIB), 2025–2026. Blueprint for Maryland’s Future Implementation Reports. Available at: aib.maryland.gov
21. CompTIA, 2024. State of the Tech Workforce 2024. Available at: comptiacdn.azureedge.net. (Maryland: 15th for net tech jobs; 228,266 tech workers; $37.8 billion tech industry contribution; 8.9% of state GDP.)
22. Milken Institute, 2022. State Technology and Science Index 2022. (Maryland ranked 4th.) Available at: milkeninstitute.org
23. WalletHub, 2024. Most & Least Innovative States 2024. (Maryland ranked 6th most innovative.) Available at: wallethub.com
24. Maryland State Archives, 2025. Maryland at a Glance: Economy – Trade. Maryland GDP 2023: $512.3 billion (up from $480.1B in 2022). AAA bond rating maintained as of May 2024. Available at: msa.maryland.gov/msa/mdmanual/01glance/economy/html/economy.html
25. U.S. Census Bureau, 2024. Population Estimates Program: State and County Population Estimates. Maryland population: 6,203,394 (2023). Available at: census.gov
26. BEA, 2026. Regional Data: GDP and Personal Income by State. Current-dollar personal income increased 3.4% annualized in Q4 2025 (state-level). Available at: apps.bea.gov/iTable/?reqid=70
27. Governor of Maryland / Office of the Governor, 2025–2026. Governor Wes Moore: FY2026 and FY2027 Budget Priorities and Press Releases. Available at: governor.maryland.gov