Deficit Watch: July 2026

Background

Pennsylvania continues to face serious fiscal challenges. The enacted 2025–26 General Fund budget created a $4.6 billion structural deficit. Gov. Josh Shapiro’s 2026–27 budget proposal would increase the deficit to more than $6 billion. Under the current policy and spending growth, long-term forecasts indicate daunting deficit increases in future years. Notably, this year marks Shapiro’s fourth missed June 30 state-mandated budget deadline.

Revenue Estimates and Collections

• The $6.8 billion deficit equals the difference between net revenue (projected revenues minus refunds) and proposed spending (including one-time transfers). For the 2026–27 budget plan, these are $46.4 billion and $53.3 billion, respectively.
• In June 2026, Pennsylvania collected $3.96 billion in revenue, $210 million above the official revenue estimate. In total, fiscal year (FY) 2025–26 collections are almost $1.14 billion (or $1,138 million) above estimated revenues.
• Shapiro’s 2026–27 budget proposal drastically overestimates the impact of his proposed tax increases. A February analysis by the Pennsylvania Independent Fiscal Office (IFO) calculates Shapiro’s revenue estimates for his marijuana, skill games, and combined reporting proposals exceed IFO estimates by $4.4 billion over the next three fiscal years.

• In June, the IFO released a revised forecast for FY 2026–27, which raises estimated revenues to $49.75 billion—a $923 million increase compared to the previous estimate.

Recommendations

• If left unaddressed, the budget deficit will represent a tax increase of $2,100 per family of four beginning in 2027.
• Lawmakers must pass a state budget that protects working families from tax increases. Other legislative actions that can assist with reducing the deficit and eliminating wasteful spending include:
  • Implementing welfare reforms to frequently verify eligibility and strengthen work requirements to reduce waste and fraud.
  • Opting into the Federal Scholarship Tax Credit and passing other education reforms to ensure funding that follows children, such as expanding tax credit scholarships and Lifeline Scholarships.
  • Supporting the Taxpayer Protection Act (TPA), a fiscal guardrail that limits state spending growth to the average rate of inflation plus population growth or personal income growth.
  • Eliminate corporate welfare and economic development spending to lower tax rates for all Pennsylvanians. This would reduce the personal income tax (PIT) rate to 2.82 percent, saving a family of four roughly $530 annually, and lower the corporate net income tax (CNIT) to 5.75 percent.
  • Pass the Regulations from the Executive in Need of Scrutiny (REINS) Act, requiring a formal cost verification process, followed by a mandatory vote in the General Assembly for regulations with an annual financial impact of $1 million or more.