Last week, Gov. Josh Shapiro delivered his second Budget Address, a marathon speech that outlined key policy priorities and summarized his proposed budget for the fiscal year beginning July 1, 2024. Here are some highlights of what the business community needs to know about this year’s spending proposal:
Budget Proposal Overview
The total proposed spending is $48.3 billion, which represents a 7.1 percent (or $3.2 billion) increase over what was enacted last year. Some legislators expressed concern that the proposal would rely on more than $3 billion in reserve funds to balance the budget and that the FY 2023-24 budget already has a $1.3 billion structural deficit.
Proposed Changes in PA Tax Structure
The governor’s proposal includes continuing the planned phase down of the Corporate Net Income Tax (CNI), which was reduced to 8.49 percent on January 1 of this year and is scheduled to be reduced to 7.99 percent on January 1, 2025. The PA Chamber worked with a bipartisan coalition of lawmakers to help enact Act 53 of 2022, which put Pennsylvania’s CNI rate on a path to be phased down from 9.99 percent to 4.99 percent by 2031.
The governor’s proposal does not call for any other changes to Pennsylvania’s tax structure. Notably, it does not include a proposal to eliminate the sales tax and gross receipts tax on cell phones, which the governor had proposed last year.
Public Safety and Transportation Funding
The proposal continues the planned phasedown of State Police funding being derived from the Motor License Fund. The proposed reduction for 2024-25 is an additional $125 million, continuing the plan to fully divest the State Police from the Motor License Fund by the 2026-27 fiscal year..
The governor also proposed increasing the amount of sales tax revenue that is earmarked for public transportation by about $280 million, which would bring total public transportation funding by the state to $1 billion, or the equivalent of 9.43 percent of sales tax collected by the Commonwealth.
DEP and Permitting Reform
The governor is requesting $10.5 million in additional DEP funding to support staffing, including 40 new positions, and to modernize operations to speed up the permitting process for businesses. He also proposes an additional $11 million for well-plugging activities, $2.5 million for 15 new positions in the Energy Programs Office to focus on transmission planning and environmental justice, and $1.5 million to expand PFAS testing capabilities.
Total K-12 education spending would increase over $1.5 billion, nearly $1.1 billion of which would go towards basic education, with $872 million infused in a new adequacy formula recommended by the Basic Education Funding Commission and $200 million through the existing Basic Education formula. Additionally, the proposal calls for a $50 million increase for Special Education, $100 million for school mental health grants, $300 million for school repairs, $30 million for the Pre-K Counts program, and significant increases for various other programs such as adult literacy, dual enrollment, and school safety. The proposal does not call for an increase in the Education Improvement Tax Credit, or creation of any school voucher program, such as the Pennsylvania Award for Student Success, which Gov. Shapiro previously supported before vetoing, prompting a months-long budget impasse last year..
The governor’s budget address outlined his recently unveiled plan to reform Pennsylvania’s higher education system. Under this plan, the Pennsylvania State System of Higher Education (PASSHE) and community colleges would operate under a shared partnership, receiving a total increase of $127 million, or 15 percent. Thaddeus Stevens College of Technology is also recommended to receive a 15 percent increase, or $3 million.
Funding for the state-related universities (Penn State, Pitt, Temple, and Lincoln), which are proposed to receive a $30 million or five percent increase, would be driven out through a new grant program at the Department of Education and would no longer be subject to a two-thirds vote of the General Assembly for passage.
The governor proposed to establish a performance-based funding model to distribute funding to public colleges and universities that considers outcomes and incentivizes helping students to earn credentials in fields facing workforce shortages, such as education, nursing, and advanced manufacturing.
In addition, the governor’s plan proposes that Pennsylvanians making less than the median year household income would pay no more than $1,000 per semester for a full, normal course load at a PASSHE school or community college and proposes a $1,000 increase in PHEAA assistance for all students.
In addition to a $2.4 million increase for career and technical education, the governor calls for an additional $2.2 million for industry partnerships, a $2 million increase for a new one-stop-shop career pathways site to ease the complications of job seeking, $2 million to aide businesses in implementing skills-based hiring, and a $2 million increase for foundations in industries to support internships at Pennsylvania companies. The proposal also asks for funds to create a new portal to help military veterans more easily reenter the workforce. Finally, the proposal seeks to increase funding for “PHARE” through the reality transfer tax, which is used to create, rehabilitate, and support affordable housing.
The proposal includes several new funding initiatives related to the governor’s recently announced economic development plan. The largest proposal is $500 million for a newly created PA SITES Fund, to fund site development and infrastructure to create shovel-ready sites. PA SITES would be funded by a $500 million bond issuance, which would be paid through a $15.4 million general fund appropriation, which annualizes to $45.2 million.
The governor’s proposal also creates a new $20 million PA Innovation line item to support entrepreneurs scaling their products, innovation, and research; creates a new $3.5 million Regional Economic Competitiveness Challenge to provide planning grants for regional growth strategies; increases funding for marketing to attract tourists by $15 million; and proposes eliminating the Keystone Communities program and replacing it with a new $25 million program called Main Street Matters.
Regional Greenhouse Gas Initiative
The governor’s budget proposal does not include any fees generated from Pennsylvania’s potential participation in RGGI, which would impose a carbon tax on energy producers. Gov. Shapiro appealed a Commonwealth court decision that ruled this proposal unconstitutional and its fate is now pending in the Pennsylvania Supreme Court.
Proposed Mandated Minimum Wage Increase
As part of his budget plan, the governor proposes a minimum wage increase to $15/hour effective January 1, 2025. The proposal also calls for a $9/hour minimum wage for tipped workers, representing a 320 percent increase in labor costs for many restaurants.
The governor proposes allowing adult use cannabis effective January 1, 2025 and assessing a 20 percent wholesale tax and sales tax at retail, which he projects would generate $15 million in the first year, increasing to $250 million by FY2028-29.
The governor also proposes regulating so-called skill games under the Pennsylvania Gaming Control Board and assessing a 42 percent tax on the daily gross gaming revenue from skill game machines. The governor estimates this tax would generate $150 million in the first year, annualizing to $315 million.
PA Human Relations Act
The governor called on the Senate to pass the so-called “Fairness Act,” legislation passed by the House to add sexual orientation and gender identity as protected classes under the PA Human Relations Act, Pennsylvania’s anti-discrimination legislation. Notably, the House-passed bill proposes to expand the PHRA further by adding the phrase “perceived” to apply to all protected classes.