DLS: Governor’s FY26 package narrows gap but relies on new taxes, cuts to education and local services

The governor’s fiscal 2026 budget narrows a projected shortfall but does not achieve the state’s spending-affordability target and depends on a mix of new revenues and spending reductions that will affect schools, local governments and health programs.

"The budget overall grows by about $800,000,000 to $67,000,000,000, a 1% growth," said David Romans, fiscal analyst with the Department of Legislative Services, during a Ways and Means Committee briefing on Jan. 21. "State general funds actually declined by $274,000,000 or 1% to $27,000,000,000. That decline in general funds reflects a lot of cost containment in the budget."

Why it matters: the Spending Affordability Committee set a structural-balance goal for fiscal 2026 — meaning ongoing revenues should cover ongoing costs — and the governor’s plan falls short by about $186 million. DLS said the governor’s package largely closes near-term gaps with $1.4 billion in revenue changes, roughly $1 billion in spending reductions and about $630 million in one-time transfers, but the mix increases medium-term pressure on the general fund.

Revenue and tax changes

The administration proposes major personal income tax changes as part of a budget reconciliation and financing act. Romans summarized the headline items: "The biggest chunk of actions is revenue adjustments, $1,300,000,000 of additional general fund revenues. $691,000,000 of that is from the personal income tax reform proposal." The plan flattens the lower brackets to a single 4.7% rate for the first four brackets while adding two higher brackets (6.25% and 6.5%) for top earners.

On capital gains, Romans said the governor would add a temporary 1% surcharge on capital gains for taxpayers with Maryland taxable income above $350,000; that surcharge is limited to four years and is estimated to generate about $128 million annually. "If your…