Deficit Watch: January 2025

Background

Pennsylvania faces serious fiscal challenges. The enacted 2024–25 General Fund budget created a $3.6 billion structural deficit, with $47.6 billion in spending and only $43.9 billion in net revenue. Revenue collection data from the first half of the fiscal year shows that the deficit may be larger than previously estimated.

Revenue Collections

• Low collections do not bode well for the budget deficit. In December 2024, Pennsylvania collected $3.77 billion in revenue, $87.2 million below the official revenue estimate. This marks the third time this year that monthly revenue collections were less than the official estimate. In total, fiscal year-to-date collections are $97.1 million below expected revenues.
• Even if collections match estimates for the rest of the fiscal year, Pennsylvania’s budget deficit will reach $3.7 billion by June.

Solutions

• Lawmakers must also resist calls to increase public school funding. State support of public education has increased by 53.8 percent over the last decade and data shows that Pennsylvania school districts are holding a collective $6.8 billion in reserve funds. Pennsylvania’s school-age population is projected to decline by 4.7 percent over the next five years. Instead, lawmakers should provide relief to students trapped in low-performing schools through the Lifeline Scholarship Program. Lifeline Scholarships would allow funding to follow these students to a school of their choice and reduce education expenditures while empowering families.
• Pennsylvania’s Independent Fiscal Office (IFO) projects Pennsylvania’s General Fund balance to reach zero next fiscal year. At the same time, the IFO projects the structural deficit will expand, reaching $6.8 billion by the end of the decade. To avoid a multi-billion dollar tax hike on Pennsylvania families, lawmakers must take steps to address government spending growth.
• Balancing the state budget to protect taxpayers requires structural budget reforms. Budget gimmicks such as delaying payments and intentional underbudgeting will not solve the structural deficit. Additionally, drawing from one-time revenue sources, like the Rainy Day Fund, is both illegal and fiscally irresponsible. Lawmakers must control spending and enact commonsense reforms like the Taxpayer Protection Act to ensure fiscally responsible budgeting.
• Human services costs, particularly in long-term care, are the biggest drivers of spending growth, partly due to Pennsylvania’s shifting demographics. As budget negotiations begin, lawmakers must address human services costs. Work requirements for healthy working-age adults and Medicaid eligibility reviews every six months would help bring the budget into balance.
• Lawmakers must resist calls to increase funding for ineffective corporate welfare programs that allow the government to pick winners and losers. Accelerating the current Corporate Net Income Tax reduction plan, stopping the Regional Greenhouse Gas Initiative, and providing relief through regulatory reform will ensure all businesses can thrive in Pennsylvania.
• Pennsylvania Taxpayers should not have to provide any more support for failing mass transit agencies. Mass transit agencies already receive over $2.47 billion in state funding and should become more reliant on funding from fares and local sources.