Summer 2025

Pennsylvania lawmakers are closing in on their final push of the 2025-2026 fiscal year budget cycle as this issue went to press. With a politically divided state government – Democratic Gov. Josh Shapiro, a narrowly Democratic-controlled House, and a Republican-led Senate – the budget battle has been a tug-of-war over spending priorities, tax policy, and structural reforms.

Pennsylvania’s political makeup often produces protracted negotiations because neither party generally holds sufficient power to unilaterally pass a budget. Last year’s budget wasn’t fully finalized until December, months after the June 30 deadline. This year could yield a similar standoff if the key issues highlighted here remain unresolved.

The state currently has a sizable General Fund budget surplus and a healthy Rainy Day Fund (nearly $13 billion combined). Democrats argue these reserves should be used to address long-standing underinvestment in schools, infrastructure, and health care. Republicans want a more cautious approach that emphasizes fiscal restraint with an eye toward the potential for economic downturn.

The PICPA and its government relations team play a proactive and influential role in Pennsylvania’s annual budget process by engaging with administration officials, legislative leaders, and key staff members. Its primary role in the process is to serve as a technical resource – offering expert insight on complex tax and financial matters. We ensure that the perspective and expertise of the accounting profession are thoughtfully considered and reflected in the final legislation. By fostering ongoing dialogue with nonpartisan analysis, the PICPA helps shape policies that promote transparency, efficiency, and economic growth across the state.

At the forefront of the debate is public education funding. Commonwealth Court ruled in 2023 that Pennsylvania’s public school funding system was unconstitutional. Lawmakers are under pressure to create a more equitable distribution formula. Shapiro and legislative Democrats are proposing significant increases to basic education funding, including targeted support for underfunded districts and a new adequacy-driven formula.

Tied to the education debate is the controversial issue of private school scholarships, often referred to as “Lifeline Scholarships” or vouchers. Senate Republicans are pushing for expanded school choice options. Shapiro supported a version of the program last year, but ultimately dropped it to avoid a budget stalemate. If the issue resurfaces, it could be a major flash point.

In his budget proposal released in February, the governor recommended accelerating the reduction of the corporate net income tax (CNIT) rate. Under his plan, the rate would decrease by 0.75 percentage points annually starting Jan. 1, 2026 (greater than the currently scheduled 0.5 percentage point reduction), reaching 4.99% by 2029, two years ahead of the original schedule. To offset the associated revenue loss, Shapiro proposes implementing a mandatory unitary combined reporting requirement for businesses operating in multiple states.

The business community largely supports the accelerated CNIT phase-down, but there is significant concern regarding mandatory combined reporting. House and Senate Republicans may push for an even faster reduction in the CNIT rate than Shapiro proposed, while Democratic lawmakers are likely to tie any such acceleration to investments in workforce development, education, and infrastructure.

In addition, the governor’s budget proposal includes eliminating three financial institution taxes – the Bank Shares Tax, the Mutual Thrift Institutions Tax, and the Private Bank Tax – and subjecting affected entities to the CNIT instead. This shift aims to simplify the tax structure and create a more uniform business tax environment.

PICPA’s State Taxation Steering Committee and its related thought leadership groups have been engaging legislators to assess the potential impact of these proposals. Their goal is to ensure lawmakers fully understand the implications for Pennsylvania’s business climate and to provide technical expertise as proposals evolve.

A key policy challenge this budget cycle is the long-term sustainability of public transportation funding. With transit systems across the commonwealth experiencing rising costs and declining ridership – most notably SEPTA in southeastern Pennsylvania and the Pittsburgh Regional Transit in the west – state officials are grappling with how to stabilize and modernize the funding model.

Shapiro’s budget calls for an increase in the state’s share of sales tax revenue dedicated to public transit, which would generate about $280 million in new annual funding. This proposal is designed to avert a fiscal crisis at the transit systems, particularly SEPTA, which warned in April of deep service reductions if new state support does not materialize.

The governor’s plan is likely to encounter resistance in the Republican-controlled Senate, where many (particularly from more rural districts) are skeptical of increasing spending on transit systems that primarily serve urban areas. While some Senate Republicans have expressed openness to discussions around transit reform, they are also calling for accountability and efficiency in return for new funding.

The June 30 deadline is quickly approaching, but sharp ideological divides remain. The Pennsylvania budget again will likely be another test of compromise in a closely divided state. 

Pennsylvania lawmakers are closing in on their final push of the 2025-2026 fiscal year budget cycle as this issue went to press. With a politically divided state government – Democratic Gov. Josh Shapiro, a narrowly Democratic-controlled House, and a Republican-led Senate – the budget battle has been a tug-of-war over spending priorities, tax policy, and structural reforms.

Pennsylvania’s political makeup often produces protracted negotiations because neither party generally holds sufficient power to unilaterally pass a budget. Last year’s budget wasn’t fully finalized until December, months after the June 30 deadline. This year could yield a similar standoff if the key issues highlighted here remain unresolved.

The state currently has a sizable General Fund budget surplus and a healthy Rainy Day Fund (nearly $13 billion combined). Democrats argue these reserves should be used to address long-standing underinvestment in schools, infrastructure, and health care. Republicans want a more cautious approach that emphasizes fiscal restraint with an eye toward the potential for economic downturn.

The PICPA and its government relations team play a proactive and influential role in Pennsylvania’s annual budget process by engaging with administration officials, legislative leaders, and key staff members. Its primary role in the process is to serve as a technical resource – offering expert insight on complex tax and financial matters. We ensure that the perspective and expertise of the accounting profession are thoughtfully considered and reflected in the final legislation. By fostering ongoing dialogue with nonpartisan analysis, the PICPA helps shape policies that promote transparency, efficiency, and economic growth across the state.

At the forefront of the debate is public education funding. Commonwealth Court ruled in 2023 that Pennsylvania’s public school funding system was unconstitutional. Lawmakers are under pressure to create a more equitable distribution formula. Shapiro and legislative Democrats are proposing significant increases to basic education funding, including targeted support for underfunded districts and a new adequacy-driven formula.

Tied to the education debate is the controversial issue of private school scholarships, often referred to as “Lifeline Scholarships” or vouchers. Senate Republicans are pushing for expanded school choice options. Shapiro supported a version of the program last year, but ultimately dropped it to avoid a budget stalemate. If the issue resurfaces, it could be a major flash point.

In his budget proposal released in February, the governor recommended accelerating the reduction of the corporate net income tax (CNIT) rate. Under his plan, the rate would decrease by 0.75 percentage points annually starting Jan. 1, 2026 (greater than the currently scheduled 0.5 percentage point reduction), reaching 4.99% by 2029, two years ahead of the original schedule. To offset the associated revenue loss, Shapiro proposes implementing a mandatory unitary combined reporting requirement for businesses operating in multiple states.

The business community largely supports the accelerated CNIT phase-down, but there is significant concern regarding mandatory combined reporting. House and Senate Republicans may push for an even faster reduction in the CNIT rate than Shapiro proposed, while Democratic lawmakers are likely to tie any such acceleration to investments in workforce development, education, and infrastructure.

In addition, the governor’s budget proposal includes eliminating three financial institution taxes – the Bank Shares Tax, the Mutual Thrift Institutions Tax, and the Private Bank Tax – and subjecting affected entities to the CNIT instead. This shift aims to simplify the tax structure and create a more uniform business tax environment.

PICPA’s State Taxation Steering Committee and its related thought leadership groups have been engaging legislators to assess the potential impact of these proposals. Their goal is to ensure lawmakers fully understand the implications for Pennsylvania’s business climate and to provide technical expertise as proposals evolve.

A key policy challenge this budget cycle is the long-term sustainability of public transportation funding. With transit systems across the commonwealth experiencing rising costs and declining ridership – most notably SEPTA in southeastern Pennsylvania and the Pittsburgh Regional Transit in the west – state officials are grappling with how to stabilize and modernize the funding model.

Shapiro’s budget calls for an increase in the state’s share of sales tax revenue dedicated to public transit, which would generate about $280 million in new annual funding. This proposal is designed to avert a fiscal crisis at the transit systems, particularly SEPTA, which warned in April of deep service reductions if new state support does not materialize.

The governor’s plan is likely to encounter resistance in the Republican-controlled Senate, where many (particularly from more rural districts) are skeptical of increasing spending on transit systems that primarily serve urban areas. While some Senate Republicans have expressed openness to discussions around transit reform, they are also calling for accountability and efficiency in return for new funding.

The June 30 deadline is quickly approaching, but sharp ideological divides remain. The Pennsylvania budget again will likely be another test of compromise in a closely divided state.