Deficit Watch: June 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.

Revenue Estimates and Collections

• The $6 billion-plus structural deficit equals the difference between net revenue (projected revenues minus refunds) and proposed spending. Shapiro proposes spending $53.3 billion in his 2026–27 budget, compared to the most recent estimate of $47.2 billion in net revenue.
• In May 2026, Pennsylvania collected $3.31 billion in revenue, $65 million below the official revenue estimate. In total, fiscal year (FY) 2025–26 collections are $926.97 million above estimates. Despite the year’s higher-than-expected revenues, a $4.6 billion gap between revenues and spending remains.
• Shapiro’s 2026–27 budget proposal drastically overestimates the impact of his proposed tax increases. A February analysis by Pennsylvania’s 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 May, the IFO released revised numbers that raise estimated revenues to $48.77 billion for FY 2025–26 and $49.56 billion for FY 2026–27. Compared to previous estimates, these represent respective increases of $848 million and $789 million.
• The biggest revenue variance from the newly revised IFO numbers is the projection for personal income tax (PIT) non-withholding (6.7 percent above estimate), which the IFO says is “likely driven by capital gains” (i.e., a strong stock market).

Recommendations

• If left unaddressed, the budget deficit will represent a tax increase of $2,100 per family of four beginning in 2027.
• Lawmakers must act now to reduce the structural deficit to protect working families from tax increases. Legislative actions that would help cut deficit and 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 state 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 all corporate welfare and economic development spending to lower tax rates for all Pennsylvanians. This would reduce the PIT rate to 2.82 percent, saving a family of four roughly $530 annually, and instantly 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.