4 things to watch in Gov. Josh Shapiro’s third budget address

HARRISBURG — Gov. Josh Shapiro will deliver his third budget address on Tuesday to a joint session of the state House and Senate, as the state faces an impending budget shortfall.

Shapiro, a Democrat in his first term who will again need to negotiate a state budget with a split legislature, is expected to build on a comprehensive plan for the state’s energy industry that he previewed last week. He is also expected to advocate for increased investments across the board for education, public safety, and more, while also pitching new revenue generators and to dip into the state’s billions in savings to help fill a $4.5 billion deficit on the horizon.

» READ MORE: Gov. Josh Shapiro says he ‘got stuff done’ in his first two years. With a budget shortfall on the horizon, his biggest challenges are to come.

Here’s what to watch for in Shapiro’s third budget pitch.

What will be a core part of Shapiro’s third budget pitch is a new focus on Pennsylvania’s energy industry, which is already a top producer nationwide. Shapiro unveiled an ambitious energy plan last week ahead of his budget address, teasing the major energy investments he wants to make in his third year. Shapiro sees his multifaceted plan as a way to produce more power in the state, lower costs to residents, create jobs, and address climate change.

His “Lightning Plan” consists of creating a new fast-track commission for energy and electric projects in the state, a revamped tax credit for energy and hydrogen projects, a promise to create incentives for nuclear and renewable energy initiatives, and more. Republican leaders have cast doubt that the plan will actually foster a thriving energy industry.

Notably, the plan does not directly mention natural gas, of which Pennsylvania is a main exporter, but its production is seen as a major contributor to climate change.

Shapiro will also certainly talk about his settlement with PJM Interconnection — an electric grid operator system for Pennsylvania and 12 other states — that his administration says will save consumers $21 billion in the next two years. He sued PJM last year over its system to determine electric capacity that threatened to significantly increase rates for residents, before reaching the settlement late last month.

Pennsylvania’s new school funding system and increased public education spending are among Shapiro’s proudest achievements as governor, he said in an interview last month. And he wants to keep building on those bipartisan agreements to improve Pennsylvania’s public schools in the form of more money going into the new school funding system.

Lawmakers and Shapiro came together to create new adequacy formulas for how the state doles out money, in response to a Commonwealth Court ruling that found the way Pennsylvania previously funded its public schools was unconstitutional and inequitable.

But advocates were worried that the new school funding system that Democrats and Republicans agreed upon would prolong an already-long process to fill a $4.5 billion spending gap from seven years to nine years. Now, they’re worried that lawmakers won’t keep increasing spending each year to ever fill the billion-dollar hole.

Whether Shapiro mentions school choice — a long-sought Republican goal to provide state funds to allow students in low-performing schools to attend private ones — will also be of interest. Shapiro has previously agreed with Republicans to create such a school choice program in Pennsylvania, but ultimately decided to line-item veto the program he helped create in 2023 and left GOP senators hurt. He previously promised to revisit the issue, but did not do so in last year’s budget agreement.

Facing reelection in 2026 — and with a growing national profile as a front-runner for the Democratic presidential primary — he could lean into the issue this year.

Three of Shapiro’s budget priorities didn’t happen as part of last year’s budget that he is expected to again pitch on Tuesday: regulating skill games, legalizing recreational marijuana, and raising the state’s $7.25 minimum wage to $15 an hour over several years.

Skill games are slot-machine look-alikes that have proliferated around the state in convenience stores, bars, so-called smoke shops, and fraternal organizations. But they are currently unregulated and untaxed, meaning Pennsylvania has no oversight and does not profit from their business — as opposed to slot machines, which are highly regulated and casinos pay the state a 54% tax to operate them.

Last year, Shapiro pitched that Pennsylvania should regulate and tax the machines at 42%, which his office estimated would bring in an additional $150 million in tax revenue to the state in its first year and continue to grow from there.

But negotiations stalled among Republicans in the state Senate on how the state should regulate the machines, and GOP leaders have recently expressed new interest in finally reaching a deal on how to tax and regulate them as part of this year’s budget negotiations. A top Senate GOP leader has advocated that revenue from skill games could go toward increasing funding for public transit in the state, as well as rebuilding the state’s roads and bridges.

» READ MORE: What’s at stake for cash-strapped SEPTA in Gov. Shapiro’s budget

Both recreational marijuana and a minimum-wage increase are harder sells to Republican leaders in the GOP-controlled state Senate (The state House is currently tied 101-101 after a Democratic member died following a medical emergency last month, but is expected to return to Democratic control after a special election next month.)

Majority Leader Joe Pittman (R., Indiana) said in an interview last month that there is still not broad support among Republican senators for approving adult-use cannabis, despite its legalization in almost all of Pennsylvania’s surrounding states.

The Senate GOP has also been reluctant to raise the state minimum wage, saying that because many wages for low-skill work have far surpassed $7.25, lawmakers do not believe that an increase is necessary.

» READ MORE: Gov. Josh Shapiro will pitch legalizing recreational marijuana in his budget address. The GOP Senate still isn’t sold.

Will Shapiro mention President Donald Trump and the current political environment in his budget address?

Shapiro, like other Democratic governors, has been more reluctant to criticize the swath of executive actions Trump has taken since his inauguration last month and has said he’d work with anyone who is trying to better Pennsylvania.

Trump has previously retaliated against Democratic governors who are critical of him, and Pennsylvania depends on federal funding for approximately 40% of its annual spending.

Shapiro did criticize Trump last week, when the Trump administration moved to pause all federal funding that led federal payment systems to crash in the state and created “lots of havoc” here.

Shapiro previously served as a foil to Trump during his first term while serving as Pennsylvania attorney general, frequently joining other Democratic attorneys general in lawsuits against his administration. Pennsylvania now has Attorney General Dave Sunday, a Republican, as the state’s top prosecutor. Sunday has not yet joined any federal actions against the Trump administration.