4.22.25 – Maryland Reporter – by Len Lazarick
The following column appears in the May issue of The Business Monthly, serving Howard and Anne Arundel counties.
I got a phone call from an old friend in the tech industry a week before the legislature closed up shop April 7. He wanted to know if the proposed 3% tax on IT services was a “done deal.”
My friend had already contacted his local lawmakers to oppose this new tax. He said all he got were routine non-committal acknowledgements. He wanted to know if it was worth making another attempt to derail the tax.
It turns out a lot of the competitors with his small IT shop are out of state and presumably wouldn’t have to pay the tax.
I had to tell him that the 3% IT tax was indeed a done deal, raising almost half a billion dollars to close a looming $3 billion state budget deficit.
Maybe we should move to Delaware, he said, as other Maryland businesses had done, though he thought his wife might not like the idea.
It’s not as if the legislators hadn’t heard about IT businesses leaving the state because of the new tax. They heard it from one of their own, Democratic Del. Brian Crosby of St. Mary’s County, where he runs an IT business that subcontracts on defense projects. As the legislation was being passed, Crosby was moving his business to Virginia, as reported by Bryan Sears of Maryland Matters. Crosby is not just an old backbencher. He is vice-chair of the House Economic Matters Committee.
Earlier in the session, Maryland businesses, lead by the state Chamber of Commerce had successfully killed a broader sales tax on business-to-business services. But the new tax which every Maryland consumer of information technology will pay – and who doesn’t use IT? – was rolled out late in the session. Legislative leaders and Gov. Wes Moore were unwilling to reduce the state budget by any more than the $2 billion in spending they had already cut.
Wide range of tech taxed
The new tax covers a wide range of data processing, cloud storage, software and technology services. The state chamber estimated that the tax would impact 15,000 employers that provide 99,000 jobs. Based on the state’s revenue estimates, these businesses take in $16 billion a year.
The tech tax also runs counter to Moore’s priorities to make Maryland more business friendly and specifically to grow the cybersecurity industry here, which has been fostered by presence of the U.S. Cyber Command at Fort Meade.
“We are sympathetic to the fiscal pressure exerted on lawmakers, but this tax is an unwise move,” said Tasha Cornish, executive director of the state’s Cybersecurity Association based in Columbia. “Maryland risks losing its competitive edge in cybersecurity, forcing companies to relocate and taking high-paying jobs with them. It’s a short-sighted attempt to gain revenue at the cost of our security and future economic stability.”
The tech tax is the largest component of new taxes and fees that will raise $1.6 billion in the next fiscal year. People making over $500,000 will move into a higher bracket at 6.25% and those making over $1 million will pay 6.5% and lose their itemized deductions. With the local piggyback tax, whose maximum was raised from 3.2% to 3.3%, high earners will be paying a total of about 10%.
Moore keeps emphasizing that 94% of Marylanders will pay less or the same amount, but that tax “cut” will only average $60. Given scores of smaller hikes in fees — tax hikes on cars and tires, a sales tax on vending machine snacks, higher taxes on gambling winnings and cannabis — there are few Marylanders who will not be paying more to the state in some fashion.
Income leaving Maryland
Will this lead to more people leaving the state because of high taxes? Several months ago I wrote about a former client who moved to Florida 25 years ago. Data from the Internal Revenue Service substantiates this flight from Maryland.
Adam Pagnucco of the Montgomery Perspective website has been massaging the IRS data in a series of recent articles. Among many other data points, they show where taxpayers filed, how much income they had, and where they filed the following year.
“The data is about as user-friendly as quantum mechanics,” says Pagnucco, “but if you battle enough downloadable spreadsheets, you can start to see patterns.”
Over a 10-year period, 2013 to 2022, Maryland lost $20 billion in adjusted gross income from 135,000 taxpayers who moved to other states. Three-quarters of that income that Maryland could no longer tax came from five jurisdictions – Montgomery, Baltimore County and City, Anne Arundel and Howard counties.
Where did these folks move? The top destination was Florida, followed by North Carolina, Texas and South Carolina. Half the people who left Maryland migrated to the top four states. (Delaware was fifth.) What do these states have in common? Lower taxes, warmer winters, and better business climates as rated by the Tax Foundation.
Heading to Florida
As Pagnucco dived deeper, he found that the number of Maryland residents fleeing to Florida has accelerated since the 2008 Great Recession (and the state tax increases that followed.) He found that almost $9 billion of that $20 billion in adjusted gross income that Maryland lost went to Florida, which has no income tax.
“Americans are continuing to leave high-tax, high-cost-of-living states in favor of lower-tax, lower-cost alternatives,” writes Katherine Loughead for the Tax Foundation. “Of the 26 states whose overall state and local tax burdens per capita were below the national average in 2022 (the most recent year of data available), 18 experienced net inbound interstate migration in FY 2024. Meanwhile, of the 25 states and DC with tax burdens per capita at or above the national average, 17 of those jurisdictions experienced net outbound domestic migration.”
Maryland ranks among the top 10 states for out-migration, reports the Tax Foundation.
Some may say these are just Republican talking points to justify their universal opposition to higher taxes. But they are also facts, backed up by numbers.
Even before the Trump firings and budget cuts, Maryland’s economy had been sluggish for a decade. Moore pledged to fix that, blaming it on Gov. Larry Hogan, and not the legislature which failed to pass some of Hogan’s tax cuts and overrode his vetoes of expensive new programs like the Blueprint for Maryland’s Future, the school reform program.
A new tax on a business sector the state wants to grow does not make it more friendly.
Len Lazarick
Len Lazarick was the founding editor and publisher of MarylandReporter.com and is currently the president of its nonprofit corporation and chairman of its board He was formerly the State House bureau chief of the daily Baltimore Examiner from its start in April 2006 to its demise in February 2009. He was a copy editor on the national desk of the Washington Post for eight years before that, and has spent decades covering Maryland politics and government.