Report: Pennsylvania budget deficit expected to balloon to $6.7B in FY26-27

Could Pennsylvania’s budget deficit rise from $3.9 billion to $6.7 billion in 12 months?

Yes, according to a report released Tuesday from the Independent Fiscal Office (IFO).

Using the IFO revenue estimate and refunds, lapses and expenditures from the Executive Budget, it is estimated that the FY25-26 deficit currently sits at $3.9B.

If new policies are excluded, the IFO anticipates the deficit exploding by 72 percent to $6.7 billion, exacerbated by a underlying structural deficit. According to its report, the primary factors driving the deficit expansion are three-fold: 1) the use of temporary monies in FY25-26 such as $1.1B from various special funds and transfers; 2) strong growth in healthcare programs for seniors, and; 3) modest net revenue growth.

For the five years prior to the Covid pandemic, net revenues expanded by 3.9% per annum. During Covid, net revenue growth surged (5.5% per annum) but then decelerated to 2.8% per annum due to factors including depleted federal stimulus, corporate tax cuts, new and expanded tax credits, a new sales tax transfer to the Public Transportation Trust Fund and the loss of interest earnings that had accrued on General Fund surplus balances.

Before Covid, spending expanded by 3.3% per annum. Since then, it has increased by 6.1% per annum driven by costs related to Human Services healthcare programs, pre-K-12 education and reduced support for the State Police from the Motor License Fund.

While Gov. Josh Shapiro’s budget hopes to raise revenue through the legalization of recreational cannabis, it does not appear to be much of a panacea to the problem.

The IFO anticipates publishing estimates for revenue proposals by the end of the month. For FY 26-27, the Executive Budget includes $1.9 billion of new revenues from proposals such as recreational cannabis, the regulation and taxing of skill games, and the enactment of combined reporting for corporate net income tax.

Last year, the corresponding estimate for similar proposals was $0.5 billion and the IFO anticipates due to the similarity to the FY 25-26 proposal, the estimates will not change significantly and will have a modest impact on the deficit.

The Shapiro administration was quick to point out that the governor has proposed updating Pennsylvania’s revenue system to deal with the state’s long-term structural imbalance, but those proposals have not yet been passed by the General Assembly. Meanwhile, the federal government has reduced or shifted funding responsibilities in some areas, which puts additional pressure on the state.

“Governor Shapiro has been clear that we can address Pennsylvania’s challenges responsibly and without broad-based tax increases by growing our economy, modernizing our revenue system, and maintaining strong reserves,” said a statement from the Governor’s Press Office. “Pennsylvania’s economy is expanding, revenues are outperforming expectations, and the Shapiro Administration remains laser-focused on delivering stability and opportunity for the people of the Commonwealth.

“The Independent Fiscal Office (IFO)’s projection excludes the recurring revenue proposals the Governor has put forward — including combined reporting, skill games regulation, and adult-use cannabis — while continuing to count spending that would be supported by those revenues. It is disingenuous to review only one side of the ledger — the IFO’s projection does not depict the true budget as proposed by the Governor.”

Republican candidate for governor and State Treasurer Stacy Garrity was quick to pounce on the numbers.

“Last week, Governor Josh Shapiro claimed Pennsylvania’s finances have never been better,” she said in a statement. “He went on to call for more than $3 billion in new spending — ignoring the current $4 billion structural deficit covered up with the last of the COVID funds.

“Shapiro insists his spending spree won’t lead to higher income or sales taxes anytime in the next five years and when anyone challenges his math, he accuses them of lying. Now the nonpartisan Pennsylvania Independent Fiscal Office has blown the whistle. Their analysis shows the deficit will explode to nearly $7 billion next year — wiping out the Rainy Day Fund.

You can repeat talking points all you want, but facts are facts. This level of spending proposed by Josh Shapiro will mean higher taxes for Pennsylvanians down the road. Josh Shapiro knows it – he’s just hoping to be gone before the bill comes due.”

Steve Ulrich is managing editor of Politics PA.