This testimony was delivered to the Maryland House Ways and Means Committee on February 26, 2026.
Chair, Vice-Chair, and Members of the Committee,
Thank you for the opportunity to provide testimony in support of House Bill 801. My name is Miles Trinidad, and I am an analyst at the Institute on Taxation and Economic Policy (ITEP), a nonprofit research group based in Washington, DC. ITEP’s research focuses on state, local, and federal tax policy issues, with an emphasis on equity and sustainability.
This bill decouples Maryland from the federal Qualified Small Business Stock (QSBS) exclusion. Doing so will protect Maryland’s fiscal health and fund important public services while ensuring equity between wealthy venture capitalists’ gains and the capital gains of other Marylanders.
The QSBS exclusion is a federal tax break that is not available to the vast majority of Marylanders. The name is misleading – actual Maryland small businesses do not benefit, nor do ordinary investors. That’s because the QSBS benefit isn’t available on stocks that your typical investor might purchase through a stock exchange. Instead, it is only available to early-stage investors who have an inside track on original stock issued directly by an eligible company. While the exemption is named for small businesses, the law does not limit investments to just small businesses by any conventional measure. The QSBS program only applies to shares held in C-corporations, which make up less than 5 percent of all businesses. Companies with assets as high as $75 million can issue eligible stock, and many small businesses are barred from eligibility from the program.[i]
These policy choices have resulted in a program that delivers 94 percent of its tax cuts to households with $1 million or more in gross income.[ii]These households can cash in their stock and pay zero dollars in federal income tax or Maryland capital gains tax, up to the greater of $15 million or 10 times their initial investment for each eligible corporation.[iii]
While QSBS is not new, QSBS is receiving increasing scrutiny here in Maryland and in other states for two main reasons. One is that a 2025 U.S. Treasury Department report provided dramatic new information on just how costly and regressive this tax break is.[iv] The report served as the foundation of ITEP’s state-by-state analysis of how much revenue states could protect by choosing not to mimic the exclusion in their own tax codes. We estimate HB 801 will protect $27.2 million in state and local revenues this year. The other reason to focus on QSBS now is that last year’s federal tax bill is phasing in a set of changes that will increase the cost in the next five years. We estimate the revenue loss in Maryland will increase to $46.6 million per year once the expanded program is in full effect in 2031.[v]
It’s important to note that this is a tax break for investments that occurred in any state across the country – not just Maryland. So if Maryland continues conforming to QSBS, the state will be using Maryland taxpayer dollars largely to subsidize investment that is happening in other states.
In other words, continued conformity to QSBS — which delivers windfalls to a narrow group of wealthy venture capitalists — would reduce revenue that Maryland relies on to fund education, healthcare, transportation, public safety, and other essential services, without providing commensurate economic in-state benefit.
As Maryland continues to face a budget deficit, this subsidy for wealthy investors needs to be revisited. Skepticism toward QSBS is widespread among tax policy experts across the ideological spectrum, and even conservative think tanks that favor broad tax cuts, such as the Tax Foundation[vi] and the American Enterprise Institute[vii], have cautioned that QSBS is not a well-designed tax policy.
For these reasons, I urge the Committee to give HB 801 a favorable report. This legislation empowers Maryland to maintain control over its tax base and ensure that tax policy serves the interests of Marylanders rather than select wealthy venture capitalists.
I look forward to answering any questions you may have. Thank you.
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[i] Internal Revenue Code, Section 1202(e)(3) excludes: (A) any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees; (B) any banking, insurance, financing, leasing, investing, or similar business; (C) any farming business (including the business of raising or harvesting trees); (D) any business involving the production or extraction of products of a character with respect to which a deduction is allowable under [IRC] section 613 or 613A [involving oil and gas extraction]; and (E) any business of operating a hotel, motel, restaurant, or similar business.
[ii] Sarah Austin and Nick Johnson. “Quite Some BS: Expanded ‘QSBS’ Giveaway in Trump Tax Law Threatens State Revenues and Enriches the Wealthy.” Institute on Taxation and Economic Policy. October 2, 2025. Available at: https://itep.org/qsbs-trump-tax-law-threatens-state-revenues-enriches-wealthy/.
[iii] Before the program was expanded in H.R. 1 of 2025, gains up to the greater of $10 million or 10 times the initial investment could be tax free.
[iv] Zahrah Abdulrauf, et al. “Quantifying the 100% Exclusion of Capital Gains on Small Business Stock.” January 2025. US Treasury Office of Tax Analysis Working Paper 127 Available at: https://home.treasury.gov/system/files/131/WP-127.pdf
[v] Sarah Austin and Nick Johnson. “Quite Some BS: Expanded ‘QSBS’ Giveaway in Trump Tax Law Threatens State Revenues and Enriches the Wealthy.” Institute on Taxation and Economic Policy. October 2, 2025. Available at: https://itep.org/qsbs-trump-tax-law-threatens-state-revenues-enriches-wealthy/.
[vi] Aleksei Shilov. “Quite the Skewed Business Subsidy: QSBS Exclusion Is a Poor Way to Encourage Investment.” The Tax Foundation. December 11, 2025. Available at: https://taxfoundation.org/blog/qualified-small-business-stock-qsbs-exclusion/.
[vii] David S. Mitchell and Kyle Pomerleau. “Congress Should Have Eliminated, Not Expanded, the QSBS Exclusion.” Tax Notes. October 10, 2025. Available at: https://www.taxnotes.com/tax-notes-today-federal/one-big-beautiful-bill-act-obbba/congress-should-have-eliminated-not-expanded-qsbs-exclusion/2025/10/10/7t2fl.
