Gov. Josh Shapiro proposes $51.5 billion budget with major investments in health care and education

HARRISBURG — Gov. Josh Shapiro proposed on Tuesday a $51.5 billion state budget in his annual address, calling for major investments in health care and education, while focusing on government efficiency as the state approaches a hefty budget shortfall.

Pennsylvania is set to spend $4.5 billion more than it brings in in revenue this year. Shapiro pitched that the state should address the deficit by creating several new revenue streams, including the taxation of recreational marijuana and so-called skill games, as well as tapping into its surpluses and an additional $1.6 billion from the state’s Rainy Day Fund — money set aside for emergencies that has thrived in recent years from federal pandemic relief.

“We have the resources we need to make smart investments now and maintain a responsible balance in reserve,” Shapiro said to a joint session of the state House and Senate in a 90-minute, impassioned speech to lawmakers with mentions of the Philadelphia Eagles, Berks County’s Taylor Swift, and famed groundhog Punxsutawney Phil.

The $51.5 billion budget proposal would increase the state’s spending by 8% from last year, and, if passed, would mark the first time Pennsylvania’s state budget has topped $50 billion.

Shapiro’s budget address is just the start of negotiations between the governor, the GOP-controlled Senate — whose leaders said Tuesday Shapiro’s budget pitch was a “fantasy” — and a narrow Democratic majority in the state House.

Lawmakers will now analyze his budget in detail in appropriations hearings, though the closed-door negotiations that actually produce a budget deal won’t take place until the summer, ahead of the June 30 budget deadline.

After accomplishing major changes to the state’s public education system last year, Shapiro’s third budget proposal marks a significant shift in focus to the state’s economic and workforce development, highlighting his desire to make Pennsylvania a place more people want to live and work. Shapiro — who has garnered a reputation for his willingness to reach across the aisle and is managing his national profile as a presidential front-runner in 2028 — also expressed continued bipartisan interest in his address in working on stereotypically right-leaning issues, such as tax reforms.

Pennsylvania’s Medicaid managed care organizations — the health insurers that are contracted by the state to provide Medicaid benefits — would get the biggest increase in state funds under Shapiro’s proposal, for a total increase of $2.5 billion. Senior administration officials said the major increase is necessary, after the state underestimated how much the groups would spend in the current fiscal year.

Shapiro also laid the groundwork to challenge private equity’s ownership of health-care entities — such as Crozer Health in Delaware County — whose private owner has filed for bankruptcy, threatening to close the hospital. He claimed that they’ve “infected” Pennsylvania’s health-care industry and wants lawmakers to prevent them from being able to buy up health systems, sell the property, and lease it back out.

“I’m done letting private equity treat Pennsylvania hospitals like a piggy bank they can empty out and smash on the floor,” Shapiro added.

For public schools, Shapiro wants to pour $526 million into the state’s new adequacy formula and tax equity supplements, a mechanism created as part of last year’s budget to address the state’s unconstitutional funding system. He also pitched that the state spend $75 million more on basic education and $40 million on special education funding, causing total expenditures to top $8.2 billion and $1.5 billion, respectively.

» READ MORE: Shapiro’s budget would give another $500 million to underfunded schools. But other increases don’t keep pace with inflation, advocates say.

But Shapiro did not mention a school voucher program in his address, which he promised to revisit last year after failing to reach a deal with House Democrats, damaging his relationship with Senate Republicans.

“We didn’t hear a word about those kids that have been trapped in those failing schools,” said Senate President Pro Tempore Kim Ward (R., Westmoreland), about schools with low-performance rates. “Regardless of how much money we’re spending on education, those schools are still failing and those kids are still trapped.”

» READ MORE: Gov. Shapiro proposes funding increases for Temple, Penn State and Pitt. But a performance-based formula has yet to be developed.

Shapiro also proposed a number of tax cuts and reforms as part of his budget, including speeding up the state’s effort to reduce its corporate net income tax by two years by cutting the rate by 0.75% instead of its scheduled 0.5% reduction per year.

“Folks in this building have been talking about cutting taxes for years,” Shapiro said. “But here I am, a Democratic governor with an aggressive plan to cut taxes, ready to work with you to get it done and make Pennsylvania more competitive.”

Republican leaders noted their longtime work on the corporate net income tax reduction before Shapiro came into office, and GOP Senate leaders said they found — even with tax cuts — that his total spending pitch was unrealistic. GOP leaders from the House and Senate said they did not want to tap into the state’s reserves to make up the budget shortfall, but the governor should be finding places to cut spending. They did not specify where they wanted to see funding cuts.

Shapiro’s administration has spent the last year piloting a project in a handful of state agencies to determine the efficacy of existing programs. This program, called the Resource Evaluation and Mission Alignment Project, found several duplicative tax credits that Shapiro proposed removing or combining to better meet the state’s needs, he said. The program also worked with the Department of Corrections to decide to close two state correctional facilities and two community detention centers — though a senior Shapiro administration official said they have not decided which centers to close.

Shapiro also touted his recent energy “Lightning Plan,” intended to encourage more renewable energy sources to help modernize the state’s electric grid, which is another priority in his third year — and one Republicans oppose.

» READ MORE: Shapiro’s budget proposal seeks more renewable energy to modernize Pennsylvania’s grid

Just as he did in his budget address last year, Shapiro, a Democrat from Abington Township, again made a fiery pitch that the state approve a $15-per-hour minimum wage and $9-per-hour tipped wage, which his office estimates would bring in $51.5 million in new revenue from income and other taxes.

“In the last session, the House of Representatives passed legislation to increase our minimum wage to $15 an hour,” Shapiro said. “And the Senate sat on their hands. That decision to do nothing is hurting our workers.”

But his proposed main revenue generators — skill games and adult-use cannabis — would bring in an estimated $900 million to help fill the $4.5 billion gap, his office estimated. He previously advocated that the state regulate the two industries, but significantly increased the projected amount of revenue both sectors would create in the 2025-26 budget proposal.

For recreational marijuana, Shapiro’s administration now estimates $536.5 million in revenue in the first year, most of which would come from licensing fees, in addition to revenue from a 20% tax on retail sales, which the administration previously did not account for.

For skill games, Shapiro increased the percentage he thinks the unregulated gaming machines should be taxed at to 52%, which is the same tax rate as slot machines in casinos or gas stations. He estimates that skill games would bring in nearly $369 million in its first year. (The skill game industry quickly rejected the high tax rate proposal, while groups associated with casinos applauded it.)

» READ MORE: SEPTA would get $165 million in Josh Shapiro’s state budget proposal, staving off service cuts

Each of Shapiro’s proposals would need to be introduced as part of legislation in the state House or Senate to come to fruition.

Senate Republicans pledged to work on the skill games issue this year, and a top House Democratic leader said his caucus would support regulating skill games if the Senate sends them a bill. The Senate GOP is still resistant to legalizing recreational marijuana.

“We’ve moved the ball down the field and put points on the board — and we should celebrate that,” Shapiro said during his speech. “But we should be hungry for more.”

Staff writer Katie Bernard contributed to this article.