New revenue sources – and longstanding debates – dominate state budget talks

If you didn’t know that Gov. Josh Shapiro believes Pennsylvania is on the rise before his Feb. 4 budget speech, you certainly did afterward. Shapiro mentioned the commonwealth’s ascent multiple times in a speech to lawmakers that laid out an ambitious spending plan amid questions and uncertainty about its fiscal future.

Shapiro’s proposed $51.5 billion spending plan – an 8% increase over current spending levels – would continue educational investments, legalize recreational cannabis, regulate so-called games of skill and remodel the commonwealth’s energy policy. 

But Shapiro is working with a divided legislature – something he is careful to emphasize when talking about his legislative accomplishments, and which will determine whether both sides can come together on issues that have been debated in the halls of Harrisburg for years.

New date, same debates

One longstanding flashpoint is the regulation and taxation of skill games – the video-gaming machines that have become prevalent in bars, convenience stores and fraternal clubs. 

“If we want Pennsylvania to compete and win, we need to take some of the money going into those slots and put it in our state coffers so we can maintain our reserves and keep building on our progress,” Shapiro said on Feb. 4.

Both parties have indicated their willingness to tap into revenue from skill games, but the legislature as a whole has failed to pass any form of regulation of the machines in years past. 

The state currently regulates video gaming terminals, also known as VGTs. Shapiro’s budget would slot skills games into the state’s VGT regulatory structure, resulting in a 52% tax on gross terminal revenue. The governor’s budget estimates that the state would raise $368.9 million in revenue in the 2025-26 fiscal year from the taxation and regulation of skill games.

House Speaker Joanna McClinton, a Democrat from Philadelphia, told City & State that lawmakers must find “compromise” on the skill games issue.

“There was a lot of talk over the last two budget cycles that we’re not going to have money for this spending; therefore, we must create new sources of revenue,” McClinton said. “And when you think about industries that create a lot of revenue, a lot of money, but currently don’t pay the taxes at all for the state government, the antennas go off.”

Another potential revenue generator – and an issue that’s been debated for years in Harrisburg – is the legalization of adult-use cannabis. 

Like last year, Shapiro called for state lawmakers to legalize recreational use, arguing that nearly every one of Pennsylvania’s neighboring states has already done so and proposing a 20% tax on the wholesale price of products sold through a regulated cannabis marketplace. Shapiro’s office estimates that the new marketplace would generate about $563 million in fiscal year 2025-2026 and $1.3 billion over the first five years of regulation. 

House Majority Leader Matt Bradford, a Democrat from Montgomery County, told City & State that while both skill games and cannabis are “large issues” that are “complicated,” Democratic leadership believes it can pass both measures this year. 

“The commonwealth has forgone untold millions, hundreds of millions of dollars,” Bradford said, referring to the legalization of cannabis. “Because the Senate has not acted on that issue, facts on the ground are going to overtake us. So the House will show what a path forward and the revenue that can be raised … will look like.”

Alex Halper, senior vice president of government affairs for the PA Chamber of Business and Industry, said that “challenging budgets are nothing new, but the reality is, Pennsylvania’s population has been stagnating for years.

“At the same time, expenditures have been increasing,” Halper continued. “Long term, the only way to address budget deficits is to bring more taxpayers to Pennsylvania – and that means both businesses who pay taxes and people they employ who also pay taxes. We need to broaden the base.”

Energy elephant in the room

The other hot-button issue surrounding budget negotiations is energy – specifically, the state’s energy production and portfolio. 

A week before his budget address, Shapiro unveiled his “lightning plan” for the energy sector, a mix of previously introduced ideas – like his plan to cap carbon emissions from the electric generation sector and revise the state’s energy portfolio standards – and new efforts, including the creation of a state board dedicated to speeding up the buildout of energy-related projects and reforming a tax credit program created in 2022. Shapiro touted that his alternative to the Regional Greenhouse Gas Initiative would benefit both consumers and energy producers. 

Some in the industry, however, don’t agree with Shapiro’s “all-of-the-above” approach. David Taylor, president and CEO of the Pennsylvania Manufacturers’ Association, told City & State that an inclusive energy portfolio can’t “pick winners and losers.”

“Messing with the energy economy is a huge mistake, especially at a time when PJM Interconnection is waving more red flags than a matador at a bullfight as to the condition of the grid and how close we are to going dark,” Taylor said. “When the governor says that he’s for all of the above, it’s just not true. If that was true, he wouldn’t be advancing policies to specifically suppress one particular kind of energy production,” he added, referring to the energy sector limits in Shapiro’s plan. 

House Minority Leader Jesse Topper, a Republican from Bedford County, told City & State that any form of a cap-and-trade program – where the state sells emissions permits and uses the tax revenues to fund renewable energy initiatives – is a nonstarter for his caucus. 

“We know what needs to happen in terms of getting stability into the market,” he said. “That’s getting out of RGGI and making sure we don’t have any kind of a carbon tax that is placed or brings instability to the market.”

Continued collaboration

Shapiro’s budget would continue making investments in public education after the state’s public school funding system was ruled unconstitutional by the state’s Commonwealth Court in 2023.

Among the proposals is a $75 million increase in basic education funding, as well as a $526 million investment through the state’s adequacy formula. It would also grow special education funding by an additional $40 million and calls for cyber charter school reforms. However, the plan does not include funding increases for school choice programs or private school vouchers – a nonstarter for some Republican lawmakers.

McClinton told City & State that “nothing’s more important” to the caucus than schools and students, adding that the 2023 decision “demands that we continue to meet our commitment to funding schools.”

Republicans, while recognizing the need for education reform, have said there must be broad, performance-based changes to how education dollars get allocated.  

“We’ve increased funding to public education every year since I’ve been in the legislature; that’s something that has not gone down. We have looked for new ways to drive out the money through different formulas,” Topper told City & State. Although he declined to get into specific dollar figures for public education investment, he emphasized that “there has to be systematic change into how these dollars are spent, the accountability for them, and what we’re getting in terms of result as student achievement … how we’re going to measure that … all of these are factors that come together when you talk about funding in addition to the formula.”

In recent years, education investment has overlapped with health care and mental health funding. Coming off last year’s negotiations, when Shapiro used a line-item veto to cut a controversial school voucher program, lawmakers have said work must be done to meet in the middle. 

But after county-based mental health funding failed to draw attention during last year’s budget negotiations, county officials are once again calling for support for existing community-based systems. 

Indiana County Commissioner and County Commissioners Association President Sherene Hess told City & State that mental health funding was cut at the local level in 2010 and has yet to be restored to those levels. “We realized (that calling for $250 million last year) was a huge, huge ask. We are now asking for $100 million,” Hess said, noting that the current gap in services is well over $1.2 billion.  

“We know that counties have the apparatus in place, we have the expertise, we have the connections in the community,” Hess said. “We believe that money could be well expended because although we’ve got community-based comprehensive care already, we need the dollars to hire more people, to do more prevention, more treatment.”

Shapiro’s budget proposal included just $20 million more in county mental health funding, leaving counties to deal with the fallout from a budget that will once again fail to meet the needs of struggling community-based systems. 

Means to the end

Recognizing the state’s aging population and growing spending needs, lawmakers on both sides have called for more pro-business policies that would support the growth of companies, workers and the tax base. 

Bradford, who noted that the state is in the strongest financial position “it has been in over a decade,” said he would like to see Harrisburg “double down” on pro-growth policies in a similar bipartisan fashion as in years past. 

Arguing for a simpler tax code, Shapiro pitched speeding up the planned corporate net income tax cuts by two years – which has received support from the business community. 

“We started rolling the boulder” on CNIT, Taylor told City & State, adding that “chronic economic underperformance” has left the commonwealth in a precarious position in the coming years. 

“Our priority is competitiveness, and one of the things that we need for a better economic climate is spending restraint,” Taylor said. “We need the decision-makers to put in the forefront that we have a structural budget deficit.”

One key to increasing growth is to ensure workers have ready access to transit. With the Southeastern Pennsylvania Transportation Authority facing a fiscal cliff, Democratic lawmakers and transit advocates are hoping Harrisburg will come through with both short- and long-term funding solutions. 

Halper, while stating that the legislature should focus on “broad transportation infrastructure,” said that the economy depends on a well-functioning, modern transportation system. 

“That includes roads and bridges, it also includes mass transit and waterways, ports and airports,” Halper told City & State. “We need a system that gets goods to market … and people to their jobs.”

Shapiro, who has vowed to not let SEPTA fail, pitched investing $290 million more in state revenue to go to the commonwealth’s public transit agencies, which would come from raising the annual share of the state’s sales tax revenue that goes to transit agencies by 1.75%. 

Lawmakers on both sides of the aisle recognize the need for broader infrastructure and transportation funding, but Philadelphia officials are continuing to sound the alarm about underfunding SEPTA. 

“Nine out of 10 people who are riding public transit anywhere in the state are going to work or school. So when we think about public transit, we should think about our economy, thinking about jobs and folks getting to work,” McClinton told City & State. “We are going to put our heads together so that we can properly fund it and make sure that they have stability in their future – not threats of layoffs or strikes or even a suspension of service. That doesn’t just send people into a spiral – it really brings destabilization to how your children get to school, how you get to work and how your mom goes to the doctor.”

If the price is right

Shapiro, who recognized that some lawmakers may “reflexively be against whatever I’m for,” noted that voters sent back essentially the same party margins that were in Harrisburg last legislative session, which he sees as a de facto call for both sides to come together and compromise. 

“Voters sent the same group back here to keep making progress,” Shapiro said on Feb. 4. “So I ask you to resist the temptation to put politics above people, and instead, let’s continue to work together to solve problems in Pennsylvania.”

“We’re talking about a lot of the same issues. We’re talking about energy production and grid reliability, but the answers are very different … We’re talking about education, but the solutions are different,” Topper said. “I think we’re in agreement on some of the issues and challenges that face Pennsylvania. Where you see the real separation is our points of view on how to fix it.”