House Majority Leader David Moon (D-Montgomery), said a proposed tax on some business-to-business services “hard reality of the moment that we’re at right now.” (File photo by Bryan P. Sears/ Maryland Matters).
Legislators are preparing for a new round of battles with businesses intent on again stopping a proposed sales tax on some services.
The proposal — identical bills in the House and Senate — would tax certain business-to-business transactions including lobbying, accounting and tax preparation services and some computer and IT services. That could generate roughly $1 billion, depending on which services end up being taxed.
The bills come as the House is moving closer to finalizing its version of the budget before sending it to the Senate in less than two weeks, and at a time when the General Assembly is grappling with solving a $3 billion deficit and growing angst over potential budget-busting cuts at the federal level.
The bills, sponsored by Del. David Moon (D-Montgomery) and Sen. Shelly Hettleman (D-Baltimore County) propose a 2.5% tax on certain business-to-business services.
“This comes at a time when we need to generate a menu of options for dealing with a large budget problem,” Moon said. “In the past, we’ve gone to other options. I think we’d be unwise not to put additional options on the table at the moment.”
The House of Delegates is finalizing its changes to the budget proposed in January by Gov. Wes Moore (D). The House was originally scheduled to send its version to the Senate by Wednesday, but that timeline was pushed back until March 18 or 19 in order to build in time to adjust to updated state revenue projections, as well as the potential for a federal government shutdown.
If the House intends on including the sales tax expansion, a hearing would likely come next week.
The bill was immediately criticized by Republicans who have vowed to oppose tax increases this session.
“In the Maryland Democrats’ obsession to raise taxes, they have now concocted a new business-to-business sales tax that will make it even more expensive to operate a business in Maryland,” Senate Minority Leader Stephen S. Hershey Jr. (R-Upper Shore) said in a statement. “With most of Maryland being an hour or less from the border of another state, many companies will seek out-of-state businesses to provide a variety of services to avoid paying this new tax.”
Hershey said the bill “solidifies Maryland as one of the most unfriendly states for business” and puts Maryland businesses “at a distinct disadvantage to competitors in other states.”
Republicans, a small minority in the House and Senate, are unable in and of themselves to derail the bills.
In recent years, the House and Senate have taken different approaches. The House over the last two years has urged tax increases. The Senate then, as now, has leaned toward budget cuts.
Moon said the service tax proposal would provide balance to any spending reductions.
“I think that’s just the hard reality of the moment that we’re at right now,” Moon said.
Because it was filed late, Moon’s bill must first come out of the House Rules Committee. That panel meets on Monday. So far Moon’s bill is not on the hearing list.
The bills reopen a years-old debate over whether the state should subject services to a sales tax.
A year ago, Moon was the lead sponsor of a proposed expansion of the sales tax to all services. The bill, once phased in, was projected to raise $3 billion.
Moon at the time, and on Tuesday, called the 2024 bill a “conversation starter.” Moon said the pared down version this year took into account what he heard last year.
“For me personally, part of the process was sticking through the hearing testimony and actually taking it to heart,” he said. “We really did take feedback from the bill last year.”
This year, Moon said the focus was to avoid services that affected housing, energy, or impacting blue collar workers.
Included on the list are taxes on accounting and tax preparation services, businesses that hire lobbying or public relations firms, permanent and temporary employment services; photography, design and printing; heavy truck and bus repair; appraisal services; sports and performing arts advertising.
The bill, he said, could raise about $1 billion. The final amount could go up or down as lawmakers finalize the list of businesses to which the tax would apply.
Businesses have successfully beaten back previous attempts to impose a service sales tax.
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Moon expects business groups will “inundate” lawmakers again over the final month of the session.
“We should expect lots of those groups coming in over the next couple of weeks,” he said.
A final budget agreement between the House and Senate will likely include a tax package, legislative sources said.
The form of a final tax package remains in flux.
Senate President Bill Ferguson (D-Baltimore City) said such a tax will receive serious consideration.
“We need to have a tax system that matches the economic realities of the state of Maryland and business services are a part of that reality from financial services to accounting to a number of areas that we know we have seen have significant growth instead of just a goods-based, manufacturing-based economy,” he said. “We’re looking at it very seriously in terms of the context of what’s ahead, knowing that things are going to get worse based on what’s happening with the federal cuts.”
On Tuesday, federal officials issued a proposed list of federal properties in Maryland that could be sold.
“Let me be clear: the federal offices across our state house hardworking employees who provide critical services to the American people day-in and day-out. From the Centers for Medicare and Medicaid Services in Woodlawn to Veterans Benefits Administration offices in Baltimore to the Census Bureau in Suitland and NOAA facilities in Silver Spring – these offices are critical to connecting Americans with vital services,” U.S Sen. Chris Van Hollen said in a statement
“While no one is opposed to bringing greater efficiency to our government, this haphazard proposal has no basis in efficiency, and – like other actions we’ve seen from the Trump-Musk Administration – this will only cause greater chaos and confusion, ultimately harming the American people and their access to Medicare, Medicaid, veterans’ services and more,” he said.
Moore in January introduced a tax proposal as part of his fiscal 2026 budget.
It is unclear how much of that plan — if any — would remain as part of the legislature’s final budget.
Included in Moore’s plan are modest tax cuts — about $173 on average — for many residents. Moore and the Board of Revenue Estimates project six-in-10 taxpayers will see a reduction. High earners would pay more with the creation of two new tax brackets and a 1% surcharge on some capital gains earnings.
The Board of Revenue Estimates review of the proposal also estimated that some taxpayers in nearly every tax bracket would pay more.
Parts of the plan including Moore’s elimination of itemized deductions face legislative opposition. Moore proposed a quarter of a percentage point corporate income tax cut beginning in fiscal 2028 that is contingent upon the legislature adopting a plan to close the so-called “combined reporting loophole.”
House Ways and Means Chair Vanessa Atterbeary was not available for an interview.
“Nothing is settled,” said Senate Budget and Taxation Chair Guy Guzzone (D-Howard) said when asked about the budget and any potential revenue plans. “There’s a lot of moving parts.”
Lawmakers will get some clarity on one of those moving parts Thursday when the Board of Revenue Estimates provides its last revenue projections before the end of the 2025 session.
Sources familiar with the projections said projected revenues will decrease by roughly $300 million. The amount represents a combined reduction over the current fiscal year and fiscal 2026.
Another moving part is the potential for federal budget cuts that could throw the state budget into even more turmoil.
Ferguson has warned for weeks that substantial changes in the federal budget, changes in Medicaid cost shares with the state and substantial federal employee layoffs could cause additional problems. The state, he said, would likely be unable to absorb all the costs and then have to resort to more cuts.
Federal lawmakers continue to hammer out a spending plan as a deadline approaches next week. In Maryland, state lawmakers believe a federal shutdown is possible.
Ferguson, speaking to reporters Tuesday, said a sales tax on services to businesses should be considered.
“It makes sense from my perspective,” Ferguson said. “Where we’ve seen the economy change, going from a goods-based economy to a service-based economy is really what Maryland has done.”
Ferguson said lawmakers need to find sustainable funding for public safety, education, health care and transportation.
In the past, proposals to tax services have met with stiff resistance from the business community.
“Couple this with the other proposals raising taxes on job creators, small businesses are faced with a massive increase in the cost of doing business in Maryland,” said Mike O’Halloran, state director of the National Federation of Independent Business. “This is the tech tax all over again. Maryland accounting firms, design companies, and consultants will lose while those in Pennsylvania and Virginia will reap the rewards. ”
The Maryland Chamber of Commerce, in a statement, called the proposal “a direct hit to Maryland’s small businesses.”
“When we talk to our members—from Main Street shops to manufacturing facilities—they tell us they’re already navigating thin margins and fierce competition,” Mary D. Kane, chamber president and CEO, said in a statement. “This B2B tax makes Maryland a more expensive place to do business, pushing companies to consider neighboring states like Virginia and Delaware, where they wouldn’t face these extra costs. We should be working to attract businesses, not driving them away.”
The chamber said such a tax will force businesses to raise prices or cut jobs.
“That’s not an economic growth strategy. It’s an economic misstep,” the chamber said in its statement.
Moore has made growing the economy and improving the state’s business climate a key focus for this session as part of addressing long-term budget problems.
A Moore spokesperson did not comment directly on the service tax proposal.
“The governor is proud to have introduced a budget that cuts taxes for two-thirds of all Marylanders, lowers the corporate tax rate, and eliminates Maryland’s unique burden as the only state with both an inheritance tax and an estate tax,” Carter Elliott, a spokesperson for the governor, said in a text message. “The governor will continue to work with the State Legislature, local leaders, and all partners involved to ensure that we pass a budget that will reform Maryland’s tax code, grow the economy, and invest in Maryland families.”