HARRISBURG — Democratic Gov. Josh Shapiro is asking the Pennsylvania legislature to legalize recreational cannabis, tax popular gaming terminals, and direct more than $500 million to the state’s poorest schools as part of his $51.4 billion budget plan.
The governor’s latest budget pitch, which he unveiled Tuesday, would send an additional $290 million to the state’s public transit agencies, invest more in a new student teacher stipend, and set a base tuition rate for cyber charter schools.
In his budget address, Shapiro also threw his support for the first time behind bipartisan proposals to expunge certain eviction records and increase state oversight of private equity acquisitions of hospitals and nursing homes. His full budget plan also includes a sweeping energy plan that targets emissions while also offering industry tax credits.
“These are commonsense Pennsylvania priorities that I know we all share,” Shapiro said in his budget address. “Some of us may have a different approach to these objectives, but we’ve got to work at it together.”
Some of these proposals would be included directly in the budget; others would likely be negotiated and passed alongside budget bills as part of a larger deal.
All told, they would mean a nearly 8% increase over Pennsylvania’s current spending.
The state will enter the coming fiscal year with about a $3 billion surplus in its general fund, which works like the state’s checking account, and about $7 billion in its rainy day fund, which functions as a savings account.
The Shapiro administration projects that the state will bring in $46.6 billion in tax revenue this year, although revenue appears to be slightly underperforming those projections. To pay for the governor’s $51.4 billion plan, the state would be required to use the last of its surplus and take about $1.6 billion out of its rainy day fund.
Such spending will likely be heavily opposed by the GOP-controlled state Senate.
The commonwealth is on track to almost completely drain its budget reserves and its rainy day fund by the end of the 2026-27 fiscal year, according to Pennsylvania’s Independent Fiscal Office.
This financial situation isn’t new. The state budget’s structural deficit — in which the commonwealth’s spending outstrips recurring revenue — has persisted for more than a decade. Despite running a surplus in recent years after bringing in higher-than-expected revenue along with a surge in pandemic-era federal spending, that deficit never went away.
Money for schools and transit
Apart from mandatory state spending bumps on federal programs like Medicaid, one of the biggest financial obligations lawmakers have in the budget is education. That has been particularly true since 2023, when a state judge ordered lawmakers to fix widespread spending inequity in public schools.
The budget lawmakers passed last year included an estimate of how much money Pennsylvania will need to send to poor schools to fulfill the terms of that ruling: $4.5 billion. It put about $500 million toward that specific need, which lawmakers have termed an “adequacy gap.”
This year, Shapiro is proposing that another $526 million go toward closing the adequacy gap.
Donna Cooper, a former state secretary of policy and planning under former Democratic Gov. Ed Rendell, told Spotlight PA she sees that number as “a terrific way to start the negotiation.”
“When I was in the governor’s office, going in with $526 million for the poorest school districts — that would have been a dramatic policy. That’s spectacular,” she said.
But despite commending Shapiro for prioritizing poor districts, Cooper also said his proposal would put Pennsylvania on a path to fill the adequacy gap — and meet the terms of the court ruling — too slowly.
If the commonwealth makes investments of roughly this size annually, it’s on track to fill the gap in about nine years. Cooper and other advocates think it should happen in four. The longer it takes, she said, “the more we are robbing the fortunes and futures of our kids.”
Shapiro also wants an additional $75 million to go to basic education and another $40 million for special education — significantly smaller increases than included in last year’s budget. Other asks include $25 million for school infrastructure projects, $15 million for Pennsylvania’s Pre-K Counts program, and $20 million for a relatively new student teacher stipend program.
The plan also includes some policy changes, most notably for cyber charter schools. The number of students who attend these schools has ballooned since the pandemic. They are funded using almost the same more-than-two-decade-old formula as brick-and-mortar charter schools, which public schools argue badly overfunds them.
Shapiro is proposing a statewide, per-student base rate of $8,000 for all cyber charters, an approach he also pitched last year. Currently that tuition, which public schools pay to charters, is based on district spending and varies widely. Public education advocates welcomed that proposal.
The governor’s budget again calls for more than $290 million more in state revenue to go to the commonwealth’s public transit agencies — which range from rural systems that deliver homebound seniors to medical appointments to multi-county bus and rail networks — to help them pay for operating expenses like worker salaries.
The state already provides these agencies with about $2 billion in direct aid. The increase comes from increasing the annual share of the state’s sales tax revenue that goes to transit agencies by 1.75%.
The issue has been brewing for years — state House Democrats first pitched an increase in fall 2023 — and is particularly pressing for SEPTA, the transit agency serving Philadelphia and its suburbs. SEPTA threatened fare hikes and service cuts without new funding, leading Shapiro to flex federal highway dollars to the agency in November 2024 as a stopgap.
Still, the agency warns those cuts are coming in July without a deal for more state aid, and Republicans have said they will only proceed with a deal if it's tied to more money for roads and bridges as well as new state revenue.
For his part, Shapiro didn’t call for any new highway funding, but senior administration officials said the state was already putting more state money into car-centered projects by reducing the amount of gas tax dollars that are diverted to fund the State Police.
How to pay for it all?
Shapiro is proposing two major new sources of revenue to cover some of these costs: legalizing recreational marijuana and regulating slot-like skill games. Both were also included in last year’s budget proposal.
His marijuana legalization proposal calls for a 20% tax on wholesale cannabis, the same rate as his plan last year. Shapiro says this will bring in $536.5 million in revenue in the first fiscal year, counting one-time licensing fees, an increase from projected revenue in Shapiro’s address last year.
Senior Shapiro administration officials said the increase is due to updated data on cannabis sales. They added that the governor would like to see the state Department of Agriculture and Department of Health oversee the regulation of recreational sales.
Shapiro also specified that $52.2 million of the cannabis revenue would go to restorative justice and social equity programs, such as loans for “new small and diverse” businesses attempting to enter the market. The remaining revenue would go to the general fund.
State Senate Republican leadership has remained skeptical about legalization, saying that the matter should be left up to the federal government.
Another proposal would tax and regulate skill games, slot-like gaming devices that have popped up in bars, clubs, and convenience stores across the commonwealth.
In his budget pitch, Shapiro proposed a 52% tax on the gross revenue of skill games, as well as the similar video gaming terminals that are only allowed in truck stops. The 52% rate is roughly what casinos pay in slots taxes, and is markedly higher than the 42% tax Shapiro included in his budget pitch last year.
Politically powerful casino operators have pushed for skill games to be taxed at similar rates as their slot machines while skill games lobbyists, who also hold sway in Harrisburg, have pushed for a much smaller tax.
Shapiro says the tax, which he estimates will be levied against 30,000 skill games and VGTs, would bring $368.9 million into the state’s general fund during its first year. He said another roughly $40 million would also be deposited directly into the state’s lottery fund.
State Senate Republican leaders have indicated that they are generally on board with regulating and taxing skill games, introducing a co-sponsorship memo for legislation that would do so. It does not include specific details, however.
Shapiro also proposed lowering the state’s corporate net income tax more quickly to reach a target of a 4.99% tax by 2029, two years earlier than currently planned.
He proposed the cut in conjunction with closing the tax loophole that allows large corporations to skirt the corporate net income tax by registering out of state, also known as the “Delaware Loophole.”
Administration officials argue that axing the loophole will only impact 11% of state businesses, but that the end result would be a net increase of $264 million in corporate income taxes.
Senior administration officials added that the state is looking to cut costs when able. That includes closing two state prisons, repealing three little-used state tax credits, and ending leases for state office space made redundant by remote or hybrid work. Combined, they said they hope those will save tens of millions of dollars in the coming years.
This story will be updated.
