better pa budget

How to Balance the PA State Budget

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Key Points

  • Pennsylvania faces a $3.6 billion structural deficit in fiscal year (FY) 2024–25.
  • Unless addressed, the deficit will require massive tax increases on working families by next year.
  • Extreme spending increases over the last few years—partly fueled by inflationary federal borrowing—created the structural deficit.
  • The largest driver of the spending growth is Medicaid for seniors, which Pennsylvania’s Independent Fiscal Office (IFO) forecasts to grow three times faster than revenue in the next five years.
  • Harrisburg needs a combination of fiscal restraint, program reforms, regulatory relief, and better tax policy to balance the budget and make Pennsylvania more attractive to businesses and families.

The Growing Deficit

After a 4.9 percent increase in spending for the 2024–25 budget, lawmakers are looking at a $3.6 billion deficit by the end of FY 2024–25 which will grow to $6.7 billion by FY 2029–30.[1]

  • The General Fund balance will turn negative by 2026, putting immense pressure on lawmakers to raise taxes.
  • Spending tied to the Taxpayer Protection Act (TPA) index would avoid the need for tax hikes. Yet, in four of the last five budgets, state spending grew faster than the TPA formula that averages the combined rate of inflation and population growth over a three-year period. For FY 2025–26, the TPA limit is $49.6 billion, or a spending increase of $2 billion.[2]
  • From 2000 to 2024, Pennsylvania’s General Fund budget grew 140 percent. Spending outpaced inflation at 81 percent and population at 6 percent. When factoring in special funds or the “shadow budget” and federal funds, Pennsylvania state spending doubled, reaching a 212 percent increase.[3]

Practices Driving the Deficit

Fiscally irresponsible spending increases over the past five fiscal years, totaling $12.55 billion, have created the current structural deficit. If Harrisburg had tied state spending increases to the TPA since FY 2020–21, Pennsylvania would have a $2.8 billion 2024–25 budget surplus. Moreover, taxpayers would have saved a total of $23.8 billion.

IFO projections for the next five years show state spending increasing much faster than state revenues. State spending remains heavily concentrated on a few programs, including Medicaid (i.e., health care for elderly, disabled, and low-income Pennsylvanians) and Pre-K–12 education, with growth forecasts as high as 37 percent while revenue increases lag at 11.2 percent.[4]

  • The IFO projects spending for Long-Term Living (the portion of Medicaid that serves seniors) to grow three times faster than revenue in the next five years. Not surprising, when considering Pennsylvania’s 65-and-older population increased 18 percent from 2015 to 2020 and IFO’s near-term projection of another 14.1 percent expansion by the end of 2025.
  • Overall, the IFO calculates state General Fund Medicaid spending to more than double from $7 million to $15 million between 2019 and 2029.[5]
  • Pre-K–12 education spending is another principal driver of the deficit. State support of public schools increased by $4.1 billion in just four years, reaching $16.7 billion in the last budget. At the same time, school districts are holding reserve funds of $6.78 billion.[6] The IFO reports continuing declines in Pennsylvania’s Pre-K–12 eligible population, 4.2 percent between 2020 and 2025 with further drops projected through 2030.[7]

Recommendations to Balance the Budget and Avoid New Taxes

Lawmakers cannot balance the budget and protect families from tax increases without restraining chronic overspending, addressing surging human service costs, refocusing education funding, and tackling tax and regulatory reforms.

1. Restrain state spending by focusing on priorities.

  • The state budget includes dozens of “Other Special Funds,” which have grown faster than the General Fund, many with significant surpluses.[8] Lawmakers should evaluate this shadow spending and utilize unreasonable surpluses toward balancing the budget.
  • Productive and cost-effective economic development policies.
    • Pennsylvania spends $1.49 billion on ineffective corporate welfare programs and tax credits.[9] Pennsylvania continues to lose out on major economic development opportunities due to its uncompetitive tax and regulatory environment.
    • Lawmakers should focus on broad-based tax cuts and regulatory reform.
  • End education supplemental funds and refocus on student-based education funding.
    • Most public school funding is allocated according to “hold harmless”—which is unrelated to student enrollment and prioritizes buildings and school employees over kids.[10] Recent state budgets added supplemental funds, known as level-up and adequacy payments, and earmarks for specific districts. These special carve outs for districts with influential lawmakers prevent accountability and encourage the continuation of large administrative spending.
  • Match mass transit subsidies with ridership and norms from other states.
    • Public transportation agencies already receive over $2.47 billion in state funding from various taxes and fees, while Pennsylvania transit agencies are more reliant on state subsidies (and less on fares and local governments) than peers in other states. Additionally, the Public Transportation Trust Fund holds $2.36 billion in reserve funds.[11] Mass transit agencies should optimize services and draw more funds from fares and local sources.[12]
  • Privatize liquor sales.
    • The Pennsylvania Liquor Control Board (PLCB) controls wine and spirit sales in Pennsylvania. The organization is a relic of the prohibition era and has increasingly struggled with ethics, waste, and incompetence over the past two decades.[13] Privatizing liquor sales in Pennsylvania would create significant cost savings while providing consumers with more accessible and affordable alcohol.[14]

2. Control human services cost drivers.

  • Work and community requirements for the able-bodies adults using Medicaid. More than one million healthy adults receive health care benefits with no requirement to engage in work or look for employment, yet research shows employment improves physical and mental health while boosting income.[15] The savings from these requirements could be reinvested in more vulnerable populations, like senior citizens.
  • Require more frequent Medicaid eligibility reviews. Currently Medicaid eligibility is evaluated once a year and in some cases without contacting the client.
  • Lawmakers should pursue audits of long-term care and managed-care providers to ensure quality and identify policies that raise costs without improving the quality of care for seniors.

3. A Lifeline for students assigned to low-achieving schools. About 200,000 children attend persistently low-achieving schools. While the state spends about $22,000 per child in public schools, the Lifeline Scholarship Program would educate children for just $5,000 to $10,000.[16] Creating Lifeline Scholarships that allows funding to follow these students to a school of their choice will reduce education expenditures and empower families.

4. Tax and regulatory relief for all Pennsylvanians.

  • Equal opportunity regulatory reform. Pennsylvania’s onerous regulatory climate shortchanges economic development. In addition to targeted strategies, like the Streamlining Permits for Economic Expansion and Development (SPEED) Program,[17] the budget should include broad-based initiatives, such as the Transparency, Reform, and Accountability for Pennsylvania (TRAP) Act, to reduce the cost of doing business in the commonwealth.[18]
  • Prohibit the entry into the Regional Greenhouse Gas Initiative (RGGI) and reject the Pennsylvania Climate Emissions Reduction Act (PACER), Gov. Josh Shapiro’s state-specific carbon tax. A good budget will stop the governor from imposing a new electricity tax.[19]
  • Accelerating the reduction of the Corporate Net Income Tax (CNIT) or a drop in the Personal Income Tax (PIT) will help Pennsylvanians battle rising costs and spur more economic development.[20]

5. Reforms to protect Pennsylvanians from overspending.

  • Amend the Pennsylvania Constitution to establish the “Taxpayer Protection Act.” This legislation would limit government spending growth to the lesser of personal income growth or inflation plus population growth, averaged over three years.[21] The TPA ensures government growth stays in line with the economy. The FY 2025–26 TPA limit is $49.6 billion.
  • Pass legislation to preserve a balanced budget. Currently, the amount appropriated during a fiscal year can exceed revenue when the official revenue estimate is inaccurate, or if the state budget becomes law without the governor’s signature. This loophole creates an out-of-balance budget. If this occurs, the Budget Secretary should be required to reduce spending to ensure appropriations reflect revenue.[22]
  • Provide transparency around supplemental appropriations. Frequently, governors spend above the enacted state budget and then come back to ask for supplemental appropriations. This additional spending should require legislative approval during the fiscal year the spending occurs—rather than tacking it to the subsequent budget.[23]

Practices to Avoid

  • Expanding corporate welfare tax credits, grants, or loans.
  • Budget gimmicks to delay payments, borrow money, or other one-time sources.
  • Raiding the state Budget Stabilization Reserve Fund, or Rainy Day Fund.
    • By law, lawmakers can only draw from the Rainy Day Fund for emergencies or unexpected downturns in the economy, and it takes a two-thirds vote of the assembly.[24] Apart from the political obstacles, rating agencies have warned Pennsylvania. In September 2023, Standard and Poor Global wrote, “we could raise the rating over the next two years if the state demonstrates a commitment to structural budgetary solutions that narrow or close projected out-year gaps, while also preserving or increasing reserve balances.”[25]
  • Raising taxes. Tax increases of any kind will deepen the deficit.
  • More bailouts for mass transit.
  • Carbon taxes.
  • A blanket increase to public schools when district reserve funds are reaching $6.78 billion.[26]

Conclusion

Pennsylvania’s looming deficits are avoidable if lawmakers and the governor are willing to break their bad spending habits and pursue the reforms that will make Pennsylvania a better place to live and work.


[1]Mathew J. Knittel, “Economic and Budget Outlook, Fiscal Years 2024–25 to 2029–30” (Harrisburg, PA: Pennsylvania Independent Fiscal Office, November 2024), 1, http://www.ifo.state.pa.us/download.cfm?file=Resources/Documents/Five_Year_Outlook_2024.pdf.

[2]Commonwealth Foundation, “The Taxpayer Protection Act,” October 29, 2024, https://commonwealthfoundation.org/research/taxpayer-protection-act-pa/. The formula for the TPA Limit uses data from the U.S. Bureau of Labor Statistics, the U.S. Census Bureau, and the U.S. Bureau of Economic Analysis. For more information, see Commonwealth Foundation, “The Taxpayer Protection Act,” January 21, 2021 https://www.commonwealthfoundation.org/policyblog/detail/the-taxpayer-protection-act.

[3]Pennsylvania Office of the Budget, “2024–2025 Governor’s Executive Budget (Program Budget Summary: General and Special Funds, B4–B6),” February, 6, 2024, https://www.pa.gov/agencies/budget/publications-and-reports/commonwealth-budget.html; U.S. Bureau of Labor Statistics, Consumer Price Index, accessed January 15, 2025, https://www.bls.gov/cpi/data.htm; U.S. Census Bureau, “State Population Totals and Components of Change: 2020–2024,” December 2024, https://www.census.gov/data/tables/time-series/demo/popest/2020s-state-total.html#par_textimage_1574439295.

[4]Knittel, “Economic and Budget Outlook,” 12.

[5]Knittel, “Economic and Budget Outlook,” 17–18.

[6]Pennsylvania Department of Education, Annual Financial Report (AFR) Data: Detailed, “–14 to 2022–23,” accessed January 10, 2025, “https://www.pa.gov/agencies/education/programs-and-services/schools/grants-and-funding/school-finances/financial-data/summary-of-annual-financial-report-data/afr-data-detailed.html”https://www.pa.gov/agencies/education/programs-and-services/schools/grants-and-funding/school-finances/financial-data/summary-of-annual-financial-report-data/afr-data-detailed.html.

[7]Mathew J. Knittel, “Pennsylvania Demographic Outlook” (Harrisburg, PA: Pennsylvania Independent Fiscal Office, October 2024), 3–4, http://www.ifo.state.pa.us/download.cfm?file=Resources/Documents/Demographics_Outlook_2024.pdf.

[8]Pennsylvania Office of the Budget, “2024–2025 Governor’s Executive Budget (Program Budget Summary). For more information, see Elizabeth Stelle, “Ten Facts About the Shadow Budget,” Commonwealth Foundation, September 11, 2017, https://commonwealthfoundation.org/research/ten-facts-about-the-shadow-budget/.

[9]Commonwealth Foundation, “Corporate Welfare in 2024–25 Budget,” March 7, 2024, https://commonwealthfoundation.org/research/corporate-welfare-2024-25-pa-budget/.

[10]Commonwealth Foundation, “Pa. School Funding Reaches $22,000 per Student in 2023,” May 20, 2024, https://commonwealthfoundation.org/research/pa-school-funding-22000-student-2023/.

[11]Pennsylvania State Treasury, Investment Pools, accessed January 9, 2025, https://www.patreasury.gov/transparency/pools.php.

[12]Commonwealth Foundation, “Mass Transit Bailout,” August 13, 2024, https://commonwealthfoundation.org/research/mass-transit-bailout/.

[13]Commonwealth Foundation, “The PLCB’s Boondoggles,” March 2022, https://commonwealthfoundation.org/research/the-plcb-boondoggles/.

[14]Commonwealth Foundation, “Liquor Privatization Constitutional Amendment,” March 2022, https://www.commonwealthfoundation.org/research/liquor-privatization-constitutional-amendment/.

[15]Pennsylvania Department of Human Services, “Office of Income Maintenance Listserv,” accessed December 2024, http://listserv.dhs.pa.gov/ma-food-stamps-and-cash-stats.html; K. Alexander Adams, “The Benefits of Work,” Georgia Center for Opportunity, May 2024, https://d1f2pmkajn85sd.cloudfront.net/wp-content/uploads/2024/05/Benefits-of-Work-May-2024.pdf.

[16]Commonwealth Foundation, “Lifeline Scholarship Program/PASS,” January 30, 2024, https://commonwealthfoundation.org/research/lifeline-scholarship-program-pass/;  Commonwealth Foundation, “Lifeline and Education Choice Myths and Facts,” January 4, 2024, https://commonwealthfoundation.org/research/lifeline-education-choice-myths-facts/.

[17]PA Chamber of Business and Industry, “DEP Launches ‘SPEED’ Act Implementation to Improve Permitting Process,” Sentinel, August 2024, https://www.pachamber.org/media/17410/dep_launches_speed_act_implementation_to_improve_permitting_process/.

[18]Sen. Kristin Phillips-Hill, “Transparency, Reform, and Accountability for Pennsylvania (TRAP Act),” Pennsylvania State Senate (Co-Sponsorship Memo 2025–26 Regular Session), December 10, 2024, https://www.legis.state.pa.us/cfdocs/Legis/CSM/showMemoPublic.cfm?chamber=S&SPick=20250&cosponId=44125.

[19]Commonwealth Foundation, “RGGI Is a Destructive Policy for Pennsylvania,” January 14, 2025, https://commonwealthfoundation.org/research/rggi-pennsylvania/;  André Béliveau, “PACER and PRESS Analysis,” Commonwealth Foundation, April 2024, https://commonwealthfoundation.org/research/pacer-press-analysis/.

[20]Commonwealth Foundation, “Proposed Tax Cuts and the 2024 State Budget,” May 28, 2024, https://commonwealthfoundation.org/research/tax-cuts-2024-pa-state-budget/.

[21]Sen. Camera Bartolotta, “Taxpayer Protection Act – Constitutional Amendment,” Pennsylvania State Senate (Co-sponsorship memo 2025–26 Regular Session), December 2, 2024, https://www.palegis.us/senate/co-sponsorship/memo?memoID=43412.

[22]Bartolotta, “Taxpayer Protection Act – Constitutional Amendment.”

[23]Sen. Kristin Phillips-Hill, “Constitutional Amendment Clarifying Supplemental Spending Approval,” Pennsylvania State Senate (Co-sponsorship memo 2025–26 Regular Session), December 12, 2024, https://www.palegis.us/senate/co-sponsorship/memo?memoID=44211.

[24]Commonwealth Foundation, “The Rainy Day Fund,” January 14, 2025, https://commonwealthfoundation.org/research/pa-rainy-day-fund/.

[25]Geoffrey E. Buswick and Thomas J. Zemetis, “Pennsylvania GO Rating Outlook Revised to Positive From Stable on Improving Financial Position; Various Ratings Affirmed,” Standard and Poor (S&P) Global, September 22, 2023, https://disclosure.spglobal.com/ratings/en/regulatory/article/-/view/type/HTML/id/3059111.

[26]Pennsylvania Department of Education, Annual Financial Report (AFR) Data: Detailed, “General Fund Balance: 2012–13 to 2022–23,” https://www.education.pa.gov/Teachers%20-%20Administrators/School%20Finances/Finances/AFR%20Data%20Summary/Pages/AFR-Data-Detailed-.aspx.