New Budget, Same Problem: Spending Outpaces Reality

After months of stalemate, state lawmakers finally pushed the FY2025-26 state budget across the finish line on November 12, 2025. The House approved the plan 156–47, the Senate followed at 40–9, and the accompanying fiscal code sailed through shortly after. But while the ink is barely dry, one thing is already clear: this spending plan leans hard on one-time cash and future revenue expectations that are unlikely. There are a number of positive provisions, mainly in permitting reform and finally freeing PA from the Regional Greenhouse Gas Initiative (RGGI) carbon tax, which former Governor Wolf unilaterally entered us into, and Governor Shapiro continued to pursue through legal action.

But the final spend number of $50.1 billion far exceeds actual revenues and puts Pennsylvania’s finances on a dangerous path toward future tax increases. As we said back in June, “the first rule of getting out of a hole is to stop digging.” The total spending numbers in FY2025-26 exceed Pennsylvania’s current revenue intake by approximately $5 billion. While the General Fund balance, one-time transfers, and lapsed funds filled the hole this year, funds are quickly running dry in sustaining this level of spending in future years. The Commonwealth Foundation estimates that by FY26-27, the structural deficit Pennsylvania faces would represent a tax increase of approximately $1,500 per family of four. Debates about the upcoming budget are mere months away, as this one was already 134 days overdue.

Tax Policy: Two Steps Forward, Three Steps Back

Pennsylvania stays on track with the long-promised Corporate Net Income Tax (CNIT) reduction, which moves from 7.99 percent to 7.49 percent in 2026 and ultimately to 4.99 percent by 2031. Improvements to Net Operating Loss (NOL) provisions were maintained, and the ability of Pennsylvania companies to offset new losses at the federal standard of 80 percent by 2029 remains intact. However, these provisions did not help Pennsylvania companies offset past losses, especially those incurred during government-mandated shutdowns in 2020. Other uncompetitive proposals such as mandatory unitary combined reporting were successfully defeated.

While the CNI and NOL provisions move the Commonwealth forward, other major tax changes push Pennsylvania backward, particularly those that decouple the state from several federal pro-growth tax reforms manufacturers rely on.

Instead of aligning with federal law to allow immediate expensing, Pennsylvania will force companies to add back federal deductions tied to research and development. That means higher state taxable income for employers reinvesting in innovation, followed by a drawn-out five-year amortization period. The estimated fiscal impact is a $754.8 million hit to employers in FY2025-26.

Lawmakers also included a requirement that the Department of Revenue must, by December 31, 2026, quantify the impact of these federal decouplings. The report must detail revenue effects, the number of taxpayers harmed, and how the CNIT rate cuts and NOL expansions compare to the additional tax burden created. If completed honestly, that report will likely confirm what employers already know: rejecting federal expensing rules creates friction, uncertainty, and unnecessary cost.

Permitting Reform: Needed Improvements Secured

The budget enacts meaningful permitting reforms that manufacturers and the broader business community have sought for years. For the first time, certain permits will be considered “deemed approved” if agencies fail to act within statutory time limits. This includes:

• Air Quality permits, approved in 30 to 35 days
• Key NPDES general permit renewals, approved in 60 to 70 days
• Additional permit types now eligible for third-party review under the expanded SPEED program

Additionally, all agencies must now maintain permit tracking systems so applicants can follow the progress of their submissions. This is basic transparency that has long lagged behind other states and hindered business growth and investment. Ensuring administrative agencies put these reforms into practice will be vital.

RGGI: A Major Win for Energy Affordability and Investment

The budget officially removes Pennsylvania from the Regional Greenhouse Gas Initiative (RGGI), a multi-state cartel that would hike energy costs and choke off investment in new electricity generation. Since 2019. PMA, industrial employers, and the skilled trades have opposed Pennsylvania’s entry into RGGI through the Power PA Jobs Alliance.

In 2023, the Pennsylvania Commonwealth Court ruled that Governor Wolf’s unilateral entry into RGGI was an unconstitutional tax levied on energy producers and that only the legislature had the authority to enact such a tax. Governor Shapiro appealed that decision to the Pennsylvania Supreme Court, with arguments heard in May and a decision expected imminently.

For more than five years, the threat of RGGI’s estimated $800 million tax would have increased Pennsylvania’s electricity prices by more than 30 percent. Attracting new generation capacity with this tax threat proved impossible. Since Pennsylvania’s attempted entry into RGGI, not a single new natural gas-fired power plant has been proposed to help stabilize our fragile electrical grid.

Education and Workforce: Disconnected from Reality

The budget floods K–12 education with $872 million in new funding, which equals nearly $3,000 additional per student, assuming those dollars actually reach students in the classroom. Pennsylvania already spends the ninth most per pupil in the country, and these increases will likely push the Commonwealth even higher. Yet proficiency scores in basic reading and math continue to lag. National Assessment of Educational Progress data shows that 69 percent of Pennsylvania’s eighth graders are not proficient in math or reading.

The budget also boosts the Educational Improvement Tax Credit by $50 million, helping low-income families secure scholarships to escape failing schools. However, a major driver of school choice, public cyber charter schools, saw their budgets slashed. Cyber charters already received 25 percent less per student than traditional public schools, and the new formula further cuts payments by an estimated $178 million. According to the Commonwealth Foundation, public cyber charters served 65,000 students in 2024-25, reflecting continued demand.

Despite Pennsylvania’s severe workforce shortages, not a single additional dollar was dedicated to Career and Technical Education, which is arguably the state’s most urgent education investment need.

The Bottom Line

This budget expands spending far beyond Pennsylvania’s current revenue trajectory, relies heavily on one-time transfers to appear balanced, and increases taxes on employers by decoupling from proven, pro-growth federal reforms. While permitting reforms and RGGI withdrawal are clear wins, state government should be committed to sustainable budgeting and fiscal policies that attract long-term business investment.