Governor Moore Fails to Improve Maryland’s Tax Competitiveness

On October 31st, the Tax Foundation released the 2025 State Tax Competitiveness Index, which ranked states’ overall tax systems and certain individual taxation categories. The index considered several criteria for ranking states, including tax system complexity, aggressiveness, and structure. Additionally, the index considers corporate income, individual income, sales, property, and unemployment insurance taxes in the overall rankings.

In August 2023, Governor Wes Moore said, “Maryland has some of the best talent and assets in the world. But our economy is not reaching its full potential [...] The time for discipline is now.” Throughout his tenure as governor, Moore has continued claiming the state needs to make “difficult fiscal decisions.” Still, while he has continued to tout the need for budgetary discipline, Maryland’s government continues to fail to have enough discipline to create a competitive tax environment. This is why it is the fifth worst state in the nation in terms of “tax competitiveness.”

Maryland’s poor ranking is not entirely new, as it has been considered one of the ten least competitive state tax environments since 2020. However, according to the Tax Foundation's new analysis, Maryland’s score has worsened since then, so that it is now ranked 46th in the nation. For some states, being uncompetitive on taxation may be acceptable. For example, Hawaii is also poorly ranked, but few states compete for people and businesses with Hawaii. Maryland, however, has four states bordering it, as well as the capital. Except for DC, every state bordering Maryland is ranked at least 12 spots higher for tax competitiveness.

Virginia, in particular, is a competitor for businesses and people looking to live in the extended DC area. Its overall state taxation competitiveness ranking is 28th, 18 places better than Maryland's. Unlike some states with few or no bordering states to compete with, Maryland’s competitiveness with other states will heavily impact how many people and businesses vote with their feet.

Examining the index, it is clear that Governor Moore must do more than he has thus far if he wants to improve Maryland’s very poor tax competitiveness ranking.

Because the index considers so many taxes, Maryland’s overall scoring is poor for a multitude of reasons. Firstly, Maryland’s income tax is very progressive, with a high maximum tax rate of 5.75%, meaning higher income earners will want to live elsewhere. Additionally, standard deductions and personal exemptions are relatively small in Maryland, and there are no tax adjustments for inflation. Thus, as the U.S. dollar’s value declines due to inflation and wages are adjusted to match that, even working-class Marylanders will slowly move into higher tax brackets.

Maryland’s corporate tax rate is 8.25 percent, significantly higher than Virginia, West Virginia, or North Carolina’s. Maryland’s inclusion of a global intangible low-taxed income in its corporate tax base makes it rare among the states. This means that even profits from non-U.S. companies owned by Marylanders are taxed at the state corporate tax rate, which many other states do not require, including Virginia and Pennsylvania.

Lastly, Maryland’s tax complexity is much higher than other states. It is the only state in the country to impose digital advertising taxes, which are difficult to navigate and comply with. Although this tax only went into effect in 2022, multiple lawsuits have already been filed contesting the law behind it. Maryland is also the only state in the country with both estate and inheritance taxes, with high maximums, further incentivizing wealthy taxpayers to leave the state.

While many of these tax policies existed before Gov. Moore entered office, a governor showing proper fiscal “discipline” should fight to reduce these taxes. Moore should pursue the fiscal discipline he advocated for at the start of his administration and increase Maryland’s tax competitiveness. Otherwise, the state will continue to lag behind its neighbors economically.

Are Maryland's Tax Rates and Regulations Pushing Residents Out of the State?

In 2013, Maryland had a net reduction in population, according to a Maryland Reporter article. Virginia, West Virginia, and D.C. also experienced net population losses but at smaller rates than Maryland. Delaware, on the other hand, experienced one of the largest net population gains in the United States.

There are many reasons why people move between states. Family, career, retirement, and weather are just a few examples. Tax rates and business climates, too, incentivize interstate migration. The exact cause of Maryland’s net loss in population is unknown, but it would be naïve to not at least speculate if high tax and unduly stringent regulatory policies are pushing people out. Maryland has recently been ranked 37^th in fiscal health, 39^th in small business climate, 40^th in overall business tax climate, and 45^th in individual income tax structure.

While high taxes and unnecessary regulations might not be the reason why Maryland experienced a net population loss, reducing tax rates and eliminating burdensome regulations could incentivize individuals and businesses to remain in the state.

New Study Shows Same Results Regarding Maryland’s Poor Business Tax Climate

The Tax Foundation released its 2015 State Business Tax Climate Index on Tuesday. Unfortunately, Maryland has not improved its ranking since the 2014 index came out. (See this press release.)

Maryland ranks 40th in overall business tax climate for the second year in a row. The index also ranks Maryland at 16th in corporate tax structure, 45th in individual income tax structure, 8th in sales tax structure, 41st in property tax structure, and 21st in unemployment insurance tax structure.

Free State Foundation scholars have written many times in the past, including several times this year, about how Maryland’s perennially high tax rates have led to businesses and residents moving out of the state (see here, here, and here). The Tax Foundation’s 2015 index provides additional evidence for why businesses might leave the state as Maryland’s neighboring states (Virginia, West Virginia, Delaware, and Pennsylvania) all rank higher. (See the chart below.)

Taken from a previous FSF blog:

“It is not just businesses possibly migrating into Virginia or other neighboring states that should be of concern. Businesses that remain in Maryland could be operating more efficiently if [tax rates] were lower.”

It is important that Maryland’s governor and legislators act to lower tax rates across the board. This would attract new businesses and encourage entrepreneurial activity and innovation – and serve to retain businesses that otherwise might move away from Maryland. These changes to the tax code would quickly improve Maryland’s business climate and, in doing so, stimulate more start-up businesses, skilled employees, investment, and consumer spending.

Maryland Tax Climate and Interstate Migration: Issues to Watch

On May 9, the Center on Budget and Policy Priorities [CBPP] released a study by Michael Mazerov which concludes that state taxes have a small impact on Americans’ interstate moves. However, migration within the U.S. is much higher than in the EU, Mexico, or even Canada. There are many factors that contribute to the high rate of migration in the U.S. But one factor that has a significant impact on internal migration is a state’s tax climate. Policymakers and legislators at the state and local level would benefit from considering the effects of their tax policies on residents’ decisions concerning whether to keep their businesses and consumer activities in state.

The Tax Foundation’s Lyman Stone brought these and other figures to light in his two recent reports responding to the CBPP’s study. He found that state tax policies in fact do relate to migration in a material way despite what Mazerov’s report may imply.

CBPP report author Michael Mazerov asserts that interstate migration is small, so it is not very important to consider the economic impact of the issue. He finds that 69% of Americans live in their home states, which means that 31% of non-foreigners in the U.S. have migrated interstate. Although Mazerov characterizes this statistic as representing “relatively few Americans,” migration in the U.S. is much higher than in neighboring nations. In Mexico, only 20% migrate, and in the EU and Canada, the numbers are much lower: 3.2% of member state residents migrate in the EU, and only 1% of Canadians migrated.

Further, the 69% figure represents a national average, which is skewed by states with very high or low migration rates. It does not take full account of states that have populations predominantly born in-state, or states in which a majority of the population migrated into the state. Such states deserve closer attention than Mazerov’s report gives them. Particularly since many of the states that experienced low migration or migration into the state are considered low-tax.

Gallup polls conducted June – December 2013 did find that taxes in some states generally matter less than some of the other many factors that contribute to a decision to migrate. However, taxes are a major factor in states like New York, Illinois, Connecticut, and our own Maryland. These are some of the wealthiest states in the nation, and therefore they have much to lose, or gain, depending on migration of revenue-generating residents.

Maryland ranked third highest among states in migration, with 47% of residents reporting that they would leave if they could; Maryland trailed closely behind Illinois (50%) and Connecticut (49%). In these top three states, “roughly as many residents want to leave as want to stay” according to the poll.

Again, while there are many factors that contribute to migration, it is significant that residents of Illinois, Maryland, and other states with high migration rates stated the top reason for planning to move was work or business related.

The Tax Foundation’s State Business Tax Index annually assesses the impact of a state’s tax system on the local business environment. The Tax Foundation ranked Maryland and other high-migration states in the lower half of its Index last year, with Maryland ranking near last at 47, as a I noted in a blog last October. Maryland also ranked 41st in the Tax Foundation’s March 2014 Facts & Figures report, which compares state tax rates, collections, burdens, and more. Maryland, New York, and Connecticut all ranked in the top-ten (high tax states) when compared on their respective high state-local tax burdens for fiscal year 2011. So there is a trend here.

There are many implications of interstate migration for state-policymakers to consider. As Gallup polls summed up some of the negative impacts: 

State leaders have important reasons for wanting to see their state populations grow rather than shrink. A growing population usually means more commerce, more economic vitality, and a bigger tax base to pay for state services. A shrinking population not only hurts government coffers, but can weaken a state politically by virtue of the potential loss of U.S. House members through redistricting every 10 years. 

State policymakers have the ability to curb out-migration by reforming state tax policy. According to the Tax Foundation rankings, “the driving force behind a state’s long-term rise or fall in the tax burden rankings is usually internal and most often a result of deliberate policy choices regarding tax and spending levels or changes in state income levels.”

Meanwhile, states with tax systems that foster business competition also tend to attract new businesses, which generate economic and employment growth. Changes to the tax code can quickly improve a state’s business climate and likely curb interstate migration, keeping skilled employees, investment, and consumer spending in state.