On February 4, Gov. Josh Shapiro delivered his third budget address, outlining key public policy priorities and summarizing his proposed budget for the fiscal year beginning July 1, 2025. You can read the PA Chamber’s statement in response to the address here.

The following are highlights relevant to the PA Chamber and broader employer community:

 

 

Budget Proposal Overview

• Total proposed spending is $51.5 billion, which represents a 7.5 percent (or $3.6 billion) increase over the current fiscal year.

• Some in the legislature expressed concern that the proposal would deplete the remaining $2.9 billion in available general fund reserves and require a transfer of $1.6 billion from the state’s rainy-day fund.

 

Proposed Changes in PA Tax Structure

• The governor’s budget proposes to accelerate the Corporate Net Income Tax (CNIT) rate reduction from 0.5 percent to 0.75 percent per year starting on January 1, 2026 and reaching 4.99 percent in 2029, two years ahead of schedule.
• The governor also proposed eliminating the Bank Shares Tax, Mutual Thrift Institution Tax, and the Private Bank Tax, while subjecting financial institutions paying those taxes to the CNIT going forward.
• Lastly, the governor’s proposal would require mandatory unitary combined reporting in conjunction with these changes.
• Combined, these changes are projected to increase tax collections by $3.7 billion over the next five years.

 

Transportation Funding

• The governor’s budget provides for $2.9 billion for transportation from the Motor License Fund, an increase of $80.7 million, or 2.9 percent. The proposal slows down the phase out of State Police funding from the Motor License Fund with a new goal to fully phase out by 2029-30, four years slower than the governor’s prior proposal.
• The proposed reduction for 2025-2026 is an additional $50 million, which is down from the previous reduction of $125 million. This delayed phase-out results in a cumulative reduction of $275 million in the amount available for roads and bridges through FY 2028-29.
• The proposal also includes a 1.3 percent increase in PennDOT funding across all sources, about $145.7 million, resulting in a total budget of $11.58 billion. This includes $6.77 billion for state highways and bridges, a 1.9 percent increase, $1.6 billion of which would be dedicated for highway maintenance, a 1.2 percent increase. Projections in the proposal include a decrease in the Liquid Fuel Allocations to decrease by $9.7 million (2 percent) in March 2026.
• The governor has proposed a total of $2.9 billion in funding for mass transit systems. The proposal includes utilizing $1.5 billion from the Public Transportation Trust Fund to finance the operations of transit systems in FY 2025-2026, an increase of $340 million.
• This additional funding is provided by the governor’s proposal to increase the amount of sales tax revenue that is earmarked for public transportation by an additional 1.75 percent (estimated $292.5 million), which would bring total public transportation funding from the Sales & Use Tax to $1.74 billion, or the equivalent of 10.38 percent of sales tax collected by the commonwealth, an increase of 24.95 percent.

 

Education Spending

• Total K-12 education spending would see a net $800 million increase, over $600 million of which would go towards basic education, with $526 million infused in the new adequacy formula adopted in last year’s budget and $75 million through the existing Basic Education formula.
• Additionally, the proposal calls for a $50 million dollar increase for Special Education, as well as increases to the PreK Counts program, adult literacy, and the Facility Improvement Grant Program.
• The proposal does not call for the implementation of school choice vouchers or an increase in the Educational Improvement Tax Credit.

 

Higher Education

• The governor’s proposal includes funding increases for a number of higher education sectors including: $13 million, or 4.7 percent for community colleges; $40.3 million, or 6.5 percent for PSSHE schools; $1.1 million, or 4.9 percent for Thaddeus Stevens College of Technology and $1.7 million, or 5 percent, for Pennsylvania College of Technology.
• Funding for Penn State University, the University of Pittsburgh, and Temple University remains level, with a new $60 million State-Related University Performance Funding appropriation proposed to support performance-based grants, pending legislative and gubernatorial approval.
• Additionally, the proposal does not include an increase for PHEAA.

 

                     Workforce Development

• In addition to a $5.4 million increase for career and technical education, the governor’s proposal calls for $2 million for a new program aimed at promoting internships and $5 million within Industry Partnerships for an initiative to support workforce initiatives to educate, train, and recruit nursing professionals.
• Additionally, the proposal adds a $55 million new appropriation to provide licensed Child Care Centers with funding for teacher recruitment and retention.
• The proposal also proposes to increase funding for “PHARE” through the reality transfer tax, which is used to create, rehabilitate, and support affordable housing.

 

Economic Development

• The proposal includes a new $50 million PA Innovation program to incentivize development in the life sciences industry. This includes a one-time, $30 million initiative to spur life sciences growth and innovation through coordination among research universities to assist businesses in bringing technologies to market and with testing needs.
• It also includes $20 million in annual funding to support large-scale innovation and match federal grants and private venture capital investments.
• The governor’s proposal also creates a new $3.5 million Regional Economic Competitiveness Challenge to provide planning grants for regional growth strategies, increases funding for Marketing to Attract Business by $3 million, and includes an additional $22.8 million for debt service payments related to the PA SITES program enacted last year.

 

“Lightning Plan” Energy Strategy

• The governor plugged his new energy strategy, which was announced two weeks ago and includes new tax incentives and permitting reforms aimed at attracting investment. However, these reforms were linked to a new cap-and-tax emissions program that economists and industry experts have warned will increase costs.
• Shapiro’s “Lightning Plan” includes measures designed to boost Pennsylvania’s energy sector, including up to $100 million in tax incentives per facility for baseload energy projects, $49 million for hydrogen hubs, and $15 million for sustainable aviation fuel development. It also includes a new RESET Board to speed up project approvals and reduce bureaucratic delays.
• The plan also proposes the Pennsylvania Climate Emissions Reduction (PACER) program, a carbon cap-and-tax system that would set a limit on carbon emissions and require companies to purchase allowances. Shapiro has previously pitched the program as a state-specific alternative to the Regional Greenhouse Gas Initiative (RGGI), and last week pledged to “immediately withdraw” Pennsylvania from RGGI if the legislature were to pass his PACER plan.

 

Proposed Mandated Minimum Wage Increase

• As part of his budget plan, the governor proposes a minimum wage increase to $15/hour for non-tipped employees and $9/hour for tipped employees, effective January 1, 2026.

 

Recreational Marijuana

• The governor proposes allowing adult use of cannabis effective January 1, 2026, and assessing a 20 percent wholesale tax, sales tax on retail, and annual licensing fees for dispensaries, processors, and growers. He projects that the initiative would generate $540 million in the first year.

 

Skill Games

• The governor also proposed regulating skill games under the authority of the Pennsylvania Gaming Control Board, and assessing a 52 percent tax on the daily gross gaming revenue from skill game machines.

• The governor estimates this tax would generate $335 million in the first year, annualizing to $1.5 billion in the second year.