Pennsylvania Gov. Josh Shapiro delivers his first budget address to a joint session of the state House and Senate on March 7, 2023 (Credit: Amanda Mustard for the Pennsylvania Capital-Star).
Gov. Josh Shapiro will address a joint session of the Pennsylvania General Assembly this week to outline his 2025-2026 state budget proposal, his third since taking office in 2023.
Going into the second half of Shapiro’s term, lawmakers and advocacy groups identify funding for education and transportation as among the most pressing needs in the next budget.
Shapiro says he’ll reintroduce and expand a plan to ensure Pennsylvania’s power supply is stable and encourage investment in clean energy technologies as dual crises of climate change and energy affordability loom.
Budget hawks, meanwhile, are watching the state’s surplus and rainy day funds, which stood at about $13.6 billion at the start of the current budget year. That amount was projected to be reduced by half by the end of this year without cuts or new revenue.
“The biggest problem for the long term is that for the last three years we have spent more than the revenue we generate,” said Marc Stier, director of the Pennsylvania Policy Center, a nonpartisan research center that promotes equitable tax policy.
But nonprofits, think tanks, unions, business groups and lawmakers are pushing Shapiro for more money for public schools, expanding school voucher programs, transit and transportation and economic growth, energy and workforce development, among other policy areas. There are also debates around recreational marijuana and gaming regulation, which could have big revenue implications.
Penn Wood High School in the William Penn School District in Lansdowne, Pennsylvania on June 15, 2023. (Credit: Amanda Berg for the Capital-Star)Education
Last year’s budget included more than $1 billion in new K-12 education spending. Just over half of that was in response to a 2023 Commonwealth Court ruling that found Pennsylvania’s previous education funding formula unconstitutionally inequitable, with the state’s reliance on property taxes leaving students in less wealthy communities at a disadvantage.
In response, lawmakers came up with a plan to distribute $4.5 billion to the state’s poorer school districts. Half a billion of that was included in last year’s budget. But this year, public education advocates are calling on the governor to speed up the distribution of the remaining $4 billion.
PA Schools Work, a coalition of nonprofits pushing for more equitable K-12 funding, including those that led the school funding lawsuit, is calling on Shapiro to commit to a plan they’re calling “Fill it in Four.” That would see $1 billion sent out this year, with a commitment to continuing that pace of funding for the next four years.
However, the four-year plan may face an uphill battle. Last year, the Republican-controlled Senate rejected a plan passed by the Democrat-controlled House that would have seen the money distributed over seven years. What the two chambers ultimately agreed on would see the adequacy funds distributed over nine years, if the pace of funding holds steady.
The Education Law Center, a PA Schools Work partner and one of the groups that led the lawsuit, is also calling on Gov. Shapiro to increase funding of basic education by around $200 million and special education by around $100 million.
Deborah Gordon Klehr, the executive director of the Education Law Center, said the increased funding will “ensure that all 500 school districts have the state support they need to keep pace with inflation.”
The group is also calling for increased funding for school building maintenance and cyber charter reform.
Chris Lilienthal, a spokesperson for the Pennsylvania State Education Association, the state’s largest teachers’ union, is also hoping for an increase in funding for student-teacher stipends. Last year, the state rolled out a program to offer financial assistance to previously unpaid student teachers working in classrooms around the state to fulfill the requirements of attaining their certifications. The funding, however, was not sufficient to cover all student-teachers who applied.
PSEA is also hoping for a cost of living adjustment for public school teachers who retired before 2001. That’s when legislation was passed boosting future pension pay, which did not affect those who had already retired.
The Commonwealth Foundation, a conservative think tank in Pennsylvania, is also calling on Shapiro to renew his commitment to a school voucher program, which would offer families public funds to spend on private school tuition and costs.
In 2023, Shapiro proposed funding such a program, generally supported by Republican lawmakers. It would have allowed students in low-performing school districts to get vouchers to attend private schools. The Senate passed a budget including it. However, as negotiations came to a head, House Democrats refused to support any budget including the measure. So Shapiro vowed to veto the program to get a budget passed, which many conservatives still view as a betrayal.
Elizabeth Stelle, the vice president of policy at the Commonwealth Foundation, supports Shapiro’s proposed plan. She said it would “make sure we’re funding students and not systems.” She noted that a single voucher for a student in a low-performing school district would cost less than the average per-student price of a year in public school.
“It’s the idea of changing the education spending formula from something that’s focused on buildings and what districts received last year, to something that follows the student,” Stelle said. “We do this with pre-K. We do this with higher education. Why aren’t we doing the same thing with K-12 education?
Public transit advocates gathered outside the Pennsylvania Capitol on Wednesday, May 8, 2024, to urge support for Gov. Josh Shapiro’s plan to increase sales tax transfers to the Public Transportation Trust Fund. (Credit: Peter Hall/Capital-Star)Transportation
Last year, Shapiro proposed a $283 million increase in transit funding statewide, with $161 million going specifically towards the state’s largest system, the Southeastern Pennsylvania Transportation Authority (SEPTA), which serves the Philadelphia metro area.
The budget passed with a stop-gap compromise with $160 million in additional funding split evenly between transit and highways.
Senate Republicans were critical of Shapiro and House Democrats for prioritizing education over mass transit and bridled at Shapiro’s diversion late last year of $153 million in federal highway funds to help SEPTA avoid service cuts and fare increases.
Shapiro said in November the “ball is squarely in the Senate’s court,” to pass a transit bill and said he would consider regulating and taxing skill games as an ongoing source of revenue.
Now, state Sen. Marty Flynn (D-Lackawanna), the ranking Democrat on the Senate Transportation Committee, said that figure “will likely need to grow,” with increasing demand and rising costs.
“Without sustainable funding, transit agencies serving millions of Pennsylvanians could face a financial crisis,” Flynn told the Capital-Star. “Without action, they may be forced to reduce service, increase fares or cut essential programs — negatively impacting residents and businesses alike. The General Assembly must provide long-term solutions to prevent this.”
Senate Transportation Committee Chairperson Judy Ward (R-Blair) said she wouldn’t discuss the budget before Shapiro’s address although she is “looking forward to reviewing the governor’s proposal and working with her colleagues on a budget in the months ahead.”
Flynn and House Transportation Committee Chairperson Ed Neilson (D-Philadelphia) both said they’re hopeful for a comprehensive transportation package that would provide funding for roads, bridges, airports, seaports and rail in addition to sustaining public transit.
During the previous session, the state House passed three bipartisan bills to increase transportation funding, although none advanced in the state Senate. The last time the Pennsylvania General Assembly passed a major transportation funding package was 2013.
“Last session, we passed a mass transit proposal three times and sent it over to the Senate. We couldn’t get an agreement with it, but they know how critical it is, and I think this time it will come to fruition,” Neilson told the Capital-Star.
Neilson and other Democrats have stressed SEPTA and other transit agencies’ importance as a key part of Pennsylvania’s economic engine with impacts far beyond the big cities.
State Rep. Morgan Cephas, a Democrat who leads the House Philadelphia delegation, said public transit “isn’t just a convenience; it’s a necessity for thousands of workers, students and businesses that rely on an efficient transportation system.
“SEPTA is facing a $200 million+ budget shortfall, while Pittsburgh Regional Transit is facing a $100 million+ deficit. These are significant gaps that require a sustainable funding solution from the state,” Cephas said in an email. “Without it, we are looking at major disruptions that will have widespread consequences across the region.”
Luke Bernstein, president and CEO of the Pennsylvania Chamber of Business and Industry, told the Capital-Star that he believes Republicans and Democrats alike all support a broad-based solution for the challenges, but need to come together on a solution.
“So while there is critical need, really, in every sector whether that be roads, bridges, multi modal transit, the only real way to approach, I think, our transportation and infrastructure challenges is going to be a broad-based and comprehensive solution,” Bernstein told the Capital-Star. “I think the governor is going to have to lead on trying to gain consensus on a comprehensive solution.”
U.S. Transportation Secretary Pete Buttigieg and U.S. Rep. Susan Wild tour the $29 million terminal connection and security checkpoint expansion at LVIA. On Tuesday, August 2, 2022, Transportation Secretary Pete Buttigieg and U. S. Rep. Susan Wild toured Lehigh Valley International Airport’s construction and later toured Lehigh Carbon Community College’s program that teaches veterans to enter the trucking industry. The funding is part of the $1.2 trillion infrastructure package approved by Congress. (Credit: DonnaFisherPhoto.com)Economic growth
Shapiro often talks about how he’s “competitive as hell.” In his last budget address, Shapiro promoted his administration’s economic strategy, saying he was “sick and tired of losing to friggin’ Ohio.”
Senate Majority Leader Joe Pittman of Indiana County and other Republicans say “pro-growth policies” from Ohio’s GOP led legislature have helped the Buckeye State economically.
The Pennsylvania Legislature passed corporate income tax reform in 2022, with a plan to reduce the rate from 10% to 5% by 2031. Last year it passed a measure that helps reduce the risk of starting a new business by gradually increasing the percentage of net operating loss owners can carry forward to offset earnings in future years. That’s set to match the federal rate of 80% by 2029.
Leaders in the business community hope that there’s continued tax reform in Shapiro’s upcoming budget. “Pennsylvania needs to be more competitive,” Bernstein said.
Bernstein also credits Shapiro for his administration’s work to eliminate hurdles to growing businesses, such as the state’s “SPEED” program.
Bernstein also said the state’s programs to reduce the wait for permits make Pennsylvania more attractive as a location for companies to grow.
Steir, of the Pennsylvania Policy Center, tax cuts for business can only accomplish so much. And he said Shapiro and lawmakers should turn attention to the state’s regressive personal income tax under which the lowest earners pay at a rate nearly twice that of the largest earners.
Paraphrasing bank robber Willie Sutton, Steir said, “The reason you tax rich people is because that’s where the money is, and if you’re not going to tax them at the same rate as everyone else you’re not going to have enough revenue.”
But Steir and Bernstein agreed that workforce development is another crucial factor in fueling economic growth. Bernstein said the state needs more workers with the education and trade skills that businesses need.
While Shapiro has had some success in expanding funding for higher education and career and technical education, Steir said “I wish the General Assembly would fund the programs he has proposed at the levels he has proposed or beyond.”
Power lines run across the ChesLen Nature Preserve in Chester County, Pa. (Credit: Peter Hall/Capital-Star)Future energy
A week before his budget address, Shapiro announced a settlement with PJM Interconnection, the operator of the electrical grid that services Pennsylvania, 12 other states and the District of Columbia, that he said would save consumers billions of dollars in unjustified electricity costs.
But while environmental and consumer groups said the settlement would prevent immediate rate hikes, more effort was needed to speed the construction of new generating capacity.
On Thursday, Shapiro announced a multi-part initiative to expand clean energy investment and create jobs as part of the 2025-2026 budget dubbed “the Lightning Plan,” in a nod to Pennsylvania founding father Ben Franklin’s experiments with electricity.
“Pennsylvania has long been a national energy leader, from Ben Franklin to today, but right now, we’re letting other states outcompete us and we’re losing out on jobs, new investment, and innovation – that has to change,” Shapiro said. “My energy plan will power Pennsylvania forward by incentivizing the building of next generation energy projects in the Commonwealth.
It would create a board dedicated to speeding up permitting and cutting red tape for new energy projects and provide investment credits for new reliable energy sources and tax credits for hydrogen projects and sustainable aviation fuel.
It also reintroduces Shapiro’s 2024 alternative to the Regional Greenhouse Gas Initiative interstate carbon cap-and-trade compact, which is the subject of a state Supreme Court challenge. Shapiro’s proposal would return carbon credit costs to Pennsylvania consumers as electricity bill rebates. He also resurrected last year’s plan to modernize outdated energy standards with incentives for carbon-neutral energy projects.
The Lightning Plan adds programs to help rural communities develop energy resources to reduce reliance on utility companies and lower energy costs, such as farm-based methane digesters, and new rebates for households that install energy efficient appliances and other methods to save electricity.
Shapiro’s proposal received approval from environmentalists, business people and labor groups.
“Taken together, they represent a once-in-a-generation framework to maximize energy outcomes that balance climate, communities and conservation,” Nature Conservancy in Pennsylvania Executive Director Lori Brennan said in a statement.
Angela Ferritto, president of Pennsylvania’s AFL-CIO, said the labor union was enthusiastic about the proposal.
“We were very encouraged that he connected these new clean energy jobs to our well-prepared union workforce – in line with our Union Energy campaign goals,” Ferritto told the Capital-Star.
Bernstein, of the Chamber of Business and Industry, said that while tax incentives and permitting improvements would help attract private investment, the group still opposes what it characterizes as a tax on carbon emissions in Shapiro’s plan.
“A carbon tax would undermine these efforts by discouraging reliable energy production, eliminating jobs and driving up costs for families and businesses. We urge the governor to work collaboratively with stakeholders and the legislature to develop a balanced, forward-looking energy plan that positions Pennsylvania for long-term success,” Bernstein said.
Hemp plants hang beneath a tent at a rally to legalize recreational cannabis outside the Pennsylvania State Capitol on April 20, 2021 (Credit: Capital-Star photo).Cannabis
Advocates for legalizing cannabis hope Shapiro will again call for legalizing adult-use recreational cannabis in his budget address. Shapiro pitched a “sin tax” on legal weed in 2024, projecting that revenue would come in slowly at first, yielding about $15 million in the first year and eventually growing to $250 million or more a year.
Earlier this month, Shapiro said that, in speaking to dispensary operators in Maryland, Ohio, New York and New Jersey near the Pennsylvania border, he learned more than 60% of customers were crossing state lines to buy their products.
“Pennsylvanians are buying cannabis, but now what’s happening is they’re paying taxes in other states,” Shapiro said. “We need to change that. We need to be more competitive.”
This year, advocates are hopeful that increased state spending and a shrinking surplus will be enough to push hesitant lawmakers over the finish line, since a cannabis tax could bring tens or hundreds of millions in state revenue.
“This is the best way to balance the budget on critical programs without raising broad-base taxes, without a hit on the middle class,” said Brit Crampsie, the communications director for Responsible PA, a pro-cannabis lobbying group.
As it stands, multiple lawmakers say they plan to introduce legislation to legalize cannabis. Disagreements over how to regulate it linger and it remains to be seen if those gaps can be bridged.
One of the major disagreements, at least within the generally more pro-cannabis Democratic Party, is whether to sell cannabis at private dispensaries or state stores like liquor.
And it’s unclear if the Republican-controlled Senate can muster support for legalization.
“I think we have a new generation of members than those who were elected in the age of ‘Reefer Madness,’” Crampsie said. “They’re seeing the economic reality. We are losing out on jobs and revenue every day that we don’t have a legal market here. The dollars and cents of it, I think, makes a very compelling case no matter which side of the aisle you’re on.”
A sign in a convenience store window advertises skill games, slot machine-like devices that are the subject of a Pennsylvania Supreme Court case. (Credit: Peter Hall/Capital-Star)Skill games
In nearly every mom and pop convenience store across Pennsylvania, slot machine-like games call out with flashing lights to passing patrons for the chance to win a jackpot.
So-called skill games operate outside the purview of the state Gaming Control Board by virtue of a subtle distinction from video gambling machines: They require an element of skill, rather than pure chance to win.
Backed by a string of court decisions holding that difference puts skill games outside the reach of the state’s gaming law, one company, Pace-O-Matic, has dominated the gray area between casinos and illicit gambling in the back rooms of bars and social clubs.
Now, Pace-O-Matic and the state’s $15 billion casino industry agree that skill games should be regulated and taxed. Shapiro also proposed this in his 2024-2025 budget, estimating that explicitly legalizing skill games would generate about $150 million in revenue.
“We welcome a discussion and debate,” Pete Shelly, the spokesperson for the casino industry group Pennsylvanians Against Gaming Expansion, noting that the gaming industry recognizes that every dollar that goes untaxed into a skill game rather than a casino slot machine costs Pennsylvania 54 cents.
Sen. Gene Yaw (R-Lycoming), whose district includes the manufacturer of Pennsylvania Skill games that run on Pace-O-Matic’s software, has floated a bill to tax the games and said he will do so again this session.
“Skill games are a piece of the economy in our state,” he told The Center Square. “They cannot and should not be ignored.”
The challenge will be agreeing on a tax rate. Casinos pay 54% of gross adjusted revenue to the state while video gaming terminal operators, who operate slot machines in truck stop gaming parlors, pay 42%. Proponents of Yaw’s legislation want skill games taxed at 16%.
