HARRISBURG — As he faces reelection, Gov. Josh Shapiro is expected to address rising housing costs, increased energy demand, and unfinished business from prior years when he unveils his budget pitch to state lawmakers on Tuesday.
A number of challenges loom for the Democrat: a divided state legislature that has passed relatively few laws, a looming structural deficit, and pressure to address a range of issues — from education and transportation funding to recreational cannabis legalization to regulating slot-like skill games.
While increased revenue is critical, the governor is not expected to propose any increases for broad-based taxes, such as sales and income levies.
His address before a joint session of the General Assembly on Tuesday kicks off talks on how to approach those issues ahead of the June 30 budget deadline. Shapiro’s first three budget deals all missed that deadline — the recent impasse lasted more than four months, with both sides boasting of wins in the end.
The speech also gives the governor a chance to highlight issues and themes beyond the state’s bottom line, similar to the president’s annual State of the Union address.
In this election year — in which both parties will be trying to flip a legislative chamber — lawmakers could face pressure to finish a deal earlier than in the past. Here’s what to watch for.
Financial pressures
Pennsylvania faces several expensive propositions in this year’s budget that, combined, put incredible pressure on the state’s already strained finances.
Public transit agencies say they are in crisis. Poor public schools won a court case that found they were unconstitutionally underfunded. Counties say they need a boost to deliver long-neglected mental health services. And President Donald Trump’s cuts to federal health care and food aid mean the state must either pay more or risk low-income families losing access to both in coming years.
Additionally, the state’s aging population is driving up the human services budget, according to the Independent Fiscal Office.
Last fiscal year, Pennsylvania brought in $46.4 billion in revenue from sales, personal, and corporate income taxes, as well as other levies. Lawmakers approved a $50.1 billion budget to fund education, health care, and public safety programs, among others.
The difference between revenue and spending was covered by the state’s cash reserves and transfers from specialized funds and agency reserves. Lawmakers pulled money from the “couch cushions of bureaucracy,” state Senate Majority Leader Joe Pittman (R., Indiana) said last year.
The budget deal also left the state with a roughly $8 billion rainy day fund. Without new revenue or cuts, that fund could be exhausted by the 2027-28 fiscal year, according to the IFO.
“My hope is that the governor will recognize that large requests for massive spending increases are not realistic,” Pittman recently told Spotlight PA
Still, he sees some space for costs to cease climbing. For instance, with the closure of two state prisons, Pittman thinks the state’s corrections budget could potentially be flat-funded.
He also said he was “very encouraged” by the administration's estimates of hundreds of millions of dollars in savings from reducing access to weight-loss drugs for Medicaid patients, which were “much more” than state Senate Republicans' own projections. As such, he thinks human services costs could grow at a less steep rate than in previous years.
Meanwhile, many legislative Democrats are advocating for their own priorities, such as raising reimbursement rates for home care workers.
Any deal would require bipartisan support. Democrats narrowly control the state House, while Republicans have a majority in the Senate.
Returning to skill games and recreational cannabis
On the revenue side, growth has been curtailed by an ongoing reduction in corporate income taxes and a ballooning set of tax credits and exemptions for private school scholarships, data centers, film production, and more. The most direct, albeit politically difficult, solution to boost revenue — a broad-based tax hike — appears to be off the table.
“Taxes absolutely will not be part of this budget,” state House Majority Leader Matt Bradford (D., Montgomery) told Spotlight PA.
Instead, the legislature will likely look, as it has for the past few years, at regulating and taxing two popular industries: recreational marijuana, which is currently illegal; and skill games, whose legality is currently being decided by the state Supreme Court. Each measure could bring in hundreds of millions of dollars annually.
Last year, House Democrats passed a bill that would legalize recreational cannabis and authorize selling the substance through state-run stores, similar to how the commonwealth sells liquor.
Supporters of the bill argue this method would prevent existing medical cannabis companies from dominating the market and shutting out small, local sellers. Senators in a key Republican-led committee voted the legislation down, saying that it’s untested, and could create logistical difficulties and unfairly exclude existing companies.
Legalization talks reached a standstill during the budget impasse, but some advocates hope lawmakers will find consensus this year.
Meredith Buettner Schneider, executive director of the Pennsylvania Cannabis Coalition, said that while she doesn’t think Shapiro’s budget proposal will “spring anything into action,” in terms of legalization, she’s found that more lawmakers are “open to the conversation.”
“We’re not talking about if we’re going to do it. We're talking about how we’re going to do it,” Buettner Schneider told Spotlight PA.
Last year, Shapiro estimated his cannabis tax would bring in $536.5 million in revenue in the first fiscal year.
Another major option is taxing and regulating skill games, the slot-like devices that have appeared in thousands of the commonwealth’s taverns, corner stores, and social clubs.
Lawmakers have consistently failed to agree on the right tax and regulatory regime for the games despite a decade of debates, with individual policy prescriptions depending on their personal views on gaming, hunger for new revenue, and allegiances to the state’s feuding gaming interests.
In last year’s budget address, Shapiro proposed a tax rate of 52% on skill games’ gross revenue, similar to that levied on casinos, which see these games as unregulated competition threatening their bottom line. His administration estimated it would bring in about $368.9 million in revenue in its first fiscal year.
Housing, energy, and emerging priorities
One relatively new issue to Harrisburg will likely be on the table in a big way this year — housing.
In 2024, Shapiro announced he was developing a housing action plan. A spokesperson said he will reveal the results Tuesday to address housing affordability after months of canvassing advocates, developers, and local officials.
The plan will likely include incentives for local governments to loosen rules about where different types of housing can be built, Spotlight PA reported last week.
For his part, Pittman demurred to the committee process to handle those land-use debates and argued that boosting homeownership is a matter of creating a good economy.
“Whatever conversation we have about housing has to revolve around individual homeownership and the ability for individuals to purchase a home and ultimately live the American dream,” he said.
Bradford, meanwhile, acknowledged that reducing governmental barriers may be a solution.
“We are recognizing that NIMBYism is a challenge in the housing space,” Bradford said, referring to the acronym for “not in my back yard.” “It's also, frankly, an issue in the energy space.”
The latter topic will also be in Shapiro’s budget pitch, a spokesperson said last week.
As part of last year’s budget deal, Shapiro and other Democrats agreed for the state to formally leave a controversial cap-and-trade program that would have limited the amount of carbon emissions some power generators could produce each year. Leaving the program had been a major goal of Republicans for years.
Both Shapiro and state Senate Republicans have highlighted lowering energy costs as a major priority, especially with the increased power demand linked to data center development, but they have offered different approaches to lowering costs.
The issue has continued to loom large. Last month, Shapiro was part of a bipartisan group of governors who reached an agreement with the Trump administration to endorse a plan aimed at preventing electricity bills from rising.
Ongoing challenges
One major “unfinished” Democratic priority is creating sustained recurring funding for public transit agencies.
Near the end of last year’s budget stalemate, the Shapiro administration gave the greenlight for major transit agencies, like SEPTA in the Philadelphia region and Allegheny County’s Pittsburgh Regional Transit, to take money meant for long-term projects from their capital budget and use it to plug gaps in their day-to-day operation expenses without cutting services. Not all smaller agencies, however, had the same flexibility.
Both legislative Democrats and Shapiro called the issue “unfinished business” that they want to address in this year’s budget.
Bradford said the issue is a priority for the commonwealth, its economy, and its workforce, and said he is open to marrying road and bridge funding with mass transit.
“We did that with Act 89 in a bipartisan way,” Bradford said, referring to the state’s last major transportation deal in 2013. “We need the same type of willingness from Republicans again to engage on that, and they will find more than a willing partner in the House.”
Pittman said that transit funding is a “conversation we’re willing to have,” as long as it’s a “conversation that includes accountability and public safety.”
But he continued to argue the state should more quickly use dollars banked for capital projects before creating any new funding sources for transportation, whether roads, bridges, buses, or trains.
Education is also a key area of continued attention due to a 2023 court ruling that found the level of state funding was historically insufficient to provide children in poor districts with their right to public schooling.
The court case did not specify a solution, but upping funding for schools has been the primary way lawmakers have addressed the case. Since then, budget deals have put more money into K-12 education, including over $500 million in the most recent budget deal to help schools address “adequacy” gaps and high tax burdens. It provided a key win for Democrats, although state Senate Republicans have increasingly questioned whether the new spending is directed in the right way.
Public education advocates are watching. At a recent news conference, Michael Churchill, an attorney at the Public Interest Law Center who was involved with the education lawsuit, said this funding obligation remains active.
“This adequacy number is not a pie-in-the-sky number. It is based on educational practices being used in Pennsylvania.”
He added that the decision creates an ongoing legislative responsibility to fund not just poor districts, but also school construction, mental health, and other educational services to keep up with inflation and ensure that there isn’t just “a new group of impoverished districts.”