As the Montgomery County Council considers County Executive Marc Elrich (D) proposal to increase the county’s income tax rate from 3.2% to 3.3%, county budget analysts are warning that the amount of potential revenue raised from such a tax could be unpredictable.
“Our income tax is volatile, it’s more volatile than our property tax,” county Deputy Director for Budget and Policy Gene Smith told members of the council’s Government Operations and Fiscal Policy Committee during a meeting Thursday.
Elrich introduced the proposal last week after withdrawing his previous suggestion to increase the county’s property tax rate by 3.4%. He said an income tax increase would be a more equitable solution for county taxpayers than a property tax hike.
Both tax hike proposals were introduced to fully fund Montgomery County Public Schools’ (MCPS) $3.65 billion budget request for fiscal year 2026, which begins July 1. The MCPS spending is included in Elrich’s proposed $7.65 billion county operating budget that’s under consideration by the council.
“This change will allow us to continue to fund both MCPS and vital County services, while mitigating the impact on individuals who might find themselves without employment because of recent action by the Federal government,” Elrich wrote in a letter to the council announcing his proposal last week.
Elrich said the new proposal was inspired by a change in state law that allows counties to increase the formerly mandated income tax rate of 3.2% to a maximum of 3.3%.
According to Elrich, the proposed income tax increase, coupled with the other revisions to the state’s tax code, is preliminarily estimated to generate between $70 million and $80 million for the county government in fiscal year 2026 and $60 million to $70 million annually thereafter.
But Smith said that while the county’s finance department has created projections of the potential revenue the county could receive from income taxes next fiscal year, many factors that make it difficult to pinpoint just how much the county could receive from a tax hike.
“The approved budget for income taxes versus actual revenues fluctuates greatly depending on individuals’ behaviors throughout the year, as well as the macroeconomics that occur throughout the year for the county and for the nation,” Smith said. “Even with the estimates that we have … it’s hard to know when and whether or not those will come in.”
Budget analysts said Thursday the current projection of income tax revenue this year is $75 million, but that number is predicted to decrease in fiscal year 2027 if the council adopts Elrich’s proposal.
“I think that’s really important for us to consider,” council President Kate Stewart (D-Dist. 4) said. She chairs the committee. “I think we’ve got to be very careful … we’re estimating an actual decrease. We have to look at this budget, but we also have to be careful about next year’s budget and the budget after that. Many of the things being requested to be added to the budget are ongoing expenses.”
With a new funding proposal introduced just weeks before the council is required to adopt a final budget plan, the council is on a much tighter timeline to make a decision about whether to adopt Elrich’s recommendation. The council is required to make a formal decision on any tax changes by May 15 if they are to be implemented in fiscal year 2026.
The committee formally voted Thursday to reject the property tax proposal, which was expected as Elrich had withdrawn it. But Elrich’s new proposal doesn’t appear to be any more popular with councilmembers than his previous one.
Councilmember Andrew Friedson (D-Dist. 1), who has been vocal in his opposition to any kind of tax increase and also a committee member, referenced Thursday how state property assessments have gone up.
“The county is receiving substantial additional revenue year over year based on assessments going up,” Friedson said. “Now, residents are paying that, but we’re viewing that as the status quo and we can raise [other tax] rates … that’s not reality.”
The main critique of councilmembers, including Stewart, is that it is difficult to justify increasing taxes on county residents when thousands have been laid off from federal jobs and some economic experts predict a recession is on the horizon due to changes from President Donald Trump’s administration at the federal level.
“We need to think about that very carefully. Our residents are really feeling the stress of what is happening right now in the country. We have seen taxes go up at the state level,” Stewart told Bethesda Today last week.
At Thursday’s committee session, Nancy Feldman, the county’s chief of the Division of Fiscal Management, said county officials are waiting to receive data on how changes at the federal level will affect the county. She said the department doesn’t have enough information yet about potential fiscal impacts to make projections.
“We are at the very beginning of receiving data that could be helpful in making decisions about how income tax may behave over the course of the next couple months,” Feldman said.
County budget analysts told councilmembers there are a lot of factors to take into consideration before passing an income tax increase.
The council is not limited to either accepting or rejecting Elrich’s proposal. Councilmembers could opt for a compromise, potentially going with a smaller increase. A decision involving this type of tax increase only requires a simple majority vote according to the county’s charter and state law That means seven of the 11 councilmembers would have to vote in favor of a tax increase for it to pass.
If the council votes to increase income taxes, councilmembers also will need to decide what aspects of Elrich’s proposal should also move forward. Elrich’s plan includes retroactive tax collection. This means that if an income tax increase is passed, it will apply to all wages earned in tax year 2025, according to Smith.
The full council will meet Monday to discuss the income tax increase proposal.
