By Adam Pagnucco.
On May 13, the county council is holding a public hearing on County Executive Marc Elrich’s recommended income tax increase. Two days later, the council will hold a straw vote on the FY26 operating budget, to which the income tax hike is intended to contribute. It’s a nearly unprecedented tight timeline between a hearing on a tax increase and a full budget vote. So is the council rushing through a tax hike?
No, but this process is seriously messed up!
Let’s map out how we got here and start in Annapolis (the source of many problems for MoCo). Governor Wes Moore’s FY26 operating budget included a host of cost shifts to the counties, which they derisively (and accurately) term shift and shaft proposals. The General Assembly approved those proposals, but in the face of squawks from county folks, they included an increase in the maximum income tax rate allowed for counties from 3.2% to 3.3%. Their message to grumpy county officials was, “Yeah, we’re shafting you, but we’re going to let you tax yourselves more to pay for it.” (Now do you see why I take such a dim view of Annapolis?)
The problem is that the General Assembly’s budget passage came after Elrich’s recommended budget was sent to the council. So Elrich sent over his proposal substituting an income tax increase for his proposed property tax hike a full five weeks after his original recommended budget. That put the council in a bind for two reasons.
First, the council’s rules of procedure require that at least 14 days advance notice must be provided to the public before a hearing is held. This prevented the council from holding a hearing immediately after Elrich’s proposal came over.
Second, Elrich’s proposal calls for a retroactive income tax increase covering all of tax year 2025. About this, the council staff noted:
Retroactive Effective Date. The General Assembly allowed local jurisdictions to enact rate changes retroactively to Tax Year 2025 as part of the Budget and Reconciliation and Financing Act of 2025. The retroactive enactment has two requirements – no tax brackets and notification to the State Comptroller by May 15, 2025.
See the procedural jam here?
On top of all of that, there is considerable uncertainty as to how much an income tax increase would actually raise. The state’s Bureau of Revenue Estimates used 2023 tax data to estimate it. Council staff used 2022 tax data to analyze it. Who knows how the county’s finance department estimated it given the fact that the General Assembly’s change came so late? Additionally, council staff wrote this:
The County’s income tax is a volatile tax. The County’s income taxes are difficult to estimate. The distribution system by the State creates a lag to account for economic and workforce trends. Also, a disproportionate amount of State filers that report a significant amount of capital gains live in Montgomery County. This is one of the reasons that the County’s residents are providing an outsized portion of the estimated new State income tax revenue from the enacted changes in 2025. It is difficult to accurately estimate capital gains because the nature of this income is behavioral (e.g., selling of businesses, real estate, and investments).
As a result, county estimates of income tax revenues often diverge by 5% or more from what actually comes in. Given how much the income tax raises (often $2 billion a year or more), that error rate could easily generate variances in the tens of millions of dollars.
So there is no conspiracy here, but only a messed up process, lots of uncertainty and – of course – the ominous cloud of a Trump economy that threatens not just MoCo but the entire Washington region. Whatever the council decides now, it will likely have to be revisited before the next budget season begins.