THE GOVERNOR’S PROPOSED BUDGET WILL UNDERGO CHANGES

 

Pennsylvania Governor Josh Shapiro’s proposed 2026-27 state budget released in February features $53.3 billion in spending. This is an estimated 5.4% increase. The proposal seeks to raise additional funds not through higher personal income or sales taxes, but by legalizing new revenue streams and utilizing state reserves to balance the budget.

Proposed state budgets are similar to party platforms at national political conventions. They provide red meat for the party faithful but are rarely adopted in full after grinding through the legislative sausage-making process. In Pennsylvania, competing priorities between the Governor and the General assembly always results in significant adjustments to proposed new programs and funding. This year, Democrat’s efforts to pass legislation to raise new categories of revenue and to gain access to the state reserves are anything but certain.

The political battle to adopt a state budget is aways a drawn out, contentious affair. Last year’s impasse ended in November 2025—over four months late—following significant disagreements between the House and Senate. This year may be worse given the unique nature of the proposals and the jockeying for position in the months before the all-important mid-term elections.

There are two issues to consider in analyzing the governor’s proposed budget. First, where will the additional funds come from, and are these sources reasonable and sustainable?

 *Recreational Marijuana Legalization. According to Wikipedia’s overview, 24 U.S. states have legalized cannabis for adult use. Governor Shapiro would follow this trend and create a new law.  A 20% wholesale tax, retail sales taxes, and licensing fees could generate $540 million in the first year.

*Skill Games taxation. The Pittsburgh Post-Gazette reports that in 2026 taxing skill games (video gaming-lottery terminals) remains a rapidly evolving issue around the country. Shapiro is in the vanguard by proposing an effective 52% tax rate on skill games (same as slot machines) with a projection of over $2 billion in revenue. The underlying debate is whether these machines constitute true skill or are simply unregulated gambling devices. The tavern lobby will oppose this legislative effort, which will reduce their revenue.

*Corporate Tax Changes. New reporting requirements would increase tax collection on multi-state corporations. This measure increases taxes from businesses operating across state lines.

*Energy Tax Proposal. This plan features a cap-and-trade system to tax carbon emissions. Critics argue that the so-called “Lighting Plan” could increase energy costs and electricity prices.

*Use of Reserves. The proposal would utilize $4.6 billion from Pennsylvania’s Budget Stabilization Reserve Fund (“Rainy-Day Fund”) to help balance the budget. The General Assembly must authorize withdrawals through a separate appropriations bill, requiring a two-thirds majority.

Republicans argue that Shapiro’s plan is constructed to avoid new taxes in 2026 but will create a structural deficit by draining the Rainy-Day Fund. They believe this could lead to future tax hikes. They also point out that the new sources of “uncertain” revenue will require legislation.

I agree with most Democrats that the Governor’s proposal is bold and demonstrates unique foresight and good judgement. Adult recreational cannabis and gambling are deeply embedded in American society. Pennsylvania needs to tax these activities to the fullest extent possible to avoid raising taxes on the millions of citizens on fixed incomes.

The Rainy-Day Fund is an important reserve intended to address emergencies like unexpected revenue shortfalls. However, the last several years have seen the fund balloon to over $7 billion. A portion of these funds should be utilized to fill the budget deficit.

The second question is, what programs will the additional funding enhance to improve the lives of the Commonwealth’s citizens?

*Education. The proposal includes an additional $923 million (a 5.2% increase) for public schools.

*Transportation. The plan diverts an additional 1.75% of sales tax revenue (about $300 million) to public transit agencies like SEPTA in Philadelphia and PRT in Pittsburgh to address deficits.

*Economic Development. Over $100 million is targeted for life sciences, robotics, and tech, along with $9 million for agriculture innovation. There is also a proposal to further cut the Corporate Net Income Tax.

*Housing and Infrastructure. A $1 billion bond-supported fund for housing development and a $500 million investment for business ready sites are proposed.

*Community Safety & Services. The proposal includes over $80 million for gun violence prevention and $10 million for non-profit security.

The only guarantee is that the proposed and final budgets will look very different. Kudos to the governor for initiating legislative debates on creative methods to raise funds that will benefit all Pennsylvanians.