Education funding boost, tax cuts on table as Pa. budget talks begin

This story originally appeared on Spotlight PA.

More than a month out from the June 30 budget deadline, top Pennsylvania lawmakers are beginning a new round of negotiations with few specific points of agreement.

The renewed deliberations come just five months after the divided legislature finalized a deadlock-plagued deal for the 2023-24 fiscal year.

Bills from the legislature’s two chambers and Gov. Josh Shapiro’s February budget address illustrate the many competing visions for the state’s annual funding plan.

Shapiro and other Democrats argue the state’s $14 billion surplus should be spent on priorities like overhauling the commonwealth’s education funding scheme to comply with a court order, stabilizing struggling public transit systems, and boosting the economy.

Meanwhile, Republicans broadly believe the money should go toward backfilling a cut to Pennsylvania’s income tax and eliminating a tax on private utility companies. The caucus says such cuts would benefit everyone, rather than a select few.

Talks haven’t turned acrimonious like they did last year when a disagreement over funding private school vouchers led to a prolonged stalemate that strained the budgets of libraries and some nonprofits.

In his budget address, Shapiro pitched billions in new spending on K-12 and higher education, public transit, economic development, housing, and health care. He proposed offsetting some of that spending by legalizing and taxing recreational marijuana and expanding legal gaming.

The state House has yet to release a formal plan, but Democratic leaders recently signed on to a bill memo that lays out a major focus for the caucus: spending more than $5 billion over seven years to close an “adequacy gap” in school funding. Such an investment was recommended by a commission that studied how Pennsylvania should meet a court mandate to make its school funding system more equitable.

While state Senate Republicans broadly agree school funding must be overhauled, the caucus recently pitched its vision for taking advantage of the surplus.

With support from some Democrats, the chamber passed a bill that would cut the state’s personal income tax from 3.07% to 2.8%, a change that would restore the rate to its 2003 level and collectively save taxpayers about $1.8 billion annually. The proposal would also eliminate a tax on private electric utilities’ profits, costing the state about $1.2 billion in annual revenue.

“There’s been a false choice, over the last several months, presented to the people of Pennsylvania,” Majority Leader Joe Pittman (R., Indiana) said at a news conference following the bill’s passage. “That false choice is that there’s too much money in the savings account and therefore we need to spend it. What we’re saying to our friends across the aisle is, ‘If you think there’s too much money in the savings account, let’s give it back to the people.’”

When asked about the proposal, Shapiro spokesperson Manuel Bonder said in a statement that Republicans “are coming to the table and acknowledging that we must invest in Pennsylvania’s future.”

He added, “We look forward to continuing to work together with the only divided legislature in the country to make critical investments in our Commonwealth.”

Room for compromise?

Every year, Pennsylvania lawmakers and the governor must approve a budget that directs billions of state dollars to education, health care for low-income people, public safety initiatives, and more.

The governor’s budget address kicks off a string of public legislative hearings before talks go behind closed doors. Leaders usually don’t hammer out the final deal until days before the deadline.

Republican state Senate leaders said their tax bill shouldn’t be interpreted as the caucus ruling out additional budget negotiations.

“We’re still going to have our debates on what gets funded with the revenues we already have [coming] in,” Appropriations Committee Chair Scott Martin (R., Lancaster) said at a news conference following the state Senate’s passage of the tax cut bill.

The caucus’ top priorities include lowering energy costs and restructuring the state’s higher education system while keeping new spending down to a minimum.

State House Democrats have repeatedly said they see room for compromise on many top GOP concerns, from energy policy to taxes. In return, they want movement on their priorities, including a minimum wage hike, expanded LGBTQ nondiscrimination protections, rules to allow community solar projects, and staffing limits for nurses in hospitals.

Elizabeth Rementer, a spokesperson for the caucus, said that while it is “open to a mixture of investments and tax cuts to facilitate a decade of economic growth, the Senate bill fails in that effort.”

Added Majority Leader Matt Bradford (D., Montgomery) during a recent panel in the Capitol: “We need a tax policy that says we’re going to cut rates, we’re going to broaden the base, and then bring in more money doing that.”

In addition to the roughly $14 billion surplus, Pennsylvania has had relatively strong tax returns this year, particularly when it comes to revenue generated from the state’s corporate net income tax.

“I’d characterize it as a solid year,” said Matt Knittel, head of the Independent Fiscal Office, which performs outside reviews of state finances. “A lot of folks last year were projecting a recession. I think two-thirds of the economists in that Wall Street Journal poll. That never happened. So relative to the expectations, I’d say [Pennsylvania’s tax returns are] performing well.”

He noted that the commonwealth still has a structural deficit, which means its annual costs exceed its annual revenue.

The IFO studied the deficit around the time of Shapiro’s budget address. Assuming that the governor’s spending proposals make it into the budget, Knittel said, “We thought that deficit was anywhere from $4 to $6 billion a year.”

Shapiro’s office projects that legalizing and taxing recreational cannabis would net the state $250 million annually after five years, and estimates that regulating and taxing skill games — slot-like machines that currently exist in a legal gray area and are fiercely opposed by casino interests — would bring in $150 million in year one.

While legal marijuana appears unlikely to be part of the final budget deal, Martin said during a recent Pennsylvania Press Club appearance that there’s “absolutely an opportunity” for skill games to be a part of budget negotiations. He added that lawmakers need to sit down to find those particulars.

Is 2024 the year for private school vouchers?

The issue that stalled budget negotiations for months last year, school vouchers, still isn’t resolved.

During the last cycle of negotiations, state Senate Republicans made a taxpayer-funded voucher program a centerpiece of their budget push. The caucus wanted to use $100 million in state money to fund scholarships that certain K-12 public school students could use to attend private institutions.

Crucially, Shapiro supports the concept. But the governor abandoned the push and cut it from the final budget deal after some state House Democrats balked.

Opinions haven’t shifted much since. State Senate Republicans are again advancing a voucher bill, and most legislative Democrats still oppose such a program.

“I’m saying this to the people in this room, I’m saying this to the colleagues on the other side of the aisle in the House, and I am saying it to the person who sits in the governor’s chair: There is no trade for vouchers,” state Sen. Lindsey Williams (D., Allegheny) said as the chamber’s Education Committee moved the voucher bill.

In his budget address, Shapiro alluded to his support for vouchers, saying there must be “conversations” about “scholarships that let poor families in struggling school districts put their kids in the best position for them to succeed.”

The issue, he said, is “unfinished business.”

What else is on the table?

Shapiro wants to spend an additional $283 million on public transit by increasing the amount of state sales tax revenue transferred to agencies across the commonwealth.

The effort is backed by groups that traditionally support Democrats, including transit unions, environmentalists, and urbanist groups that often represent transit riders. Business advocates — including Ryan Unger of the Harrisburg Regional Chamber and Capital Region Economic Development Corporation — are also throwing their weight behind the push.

In a survey of local employers, Unger said that training or skills aren’t necessarily the primary barriers to hiring. Rather, it’s people who can “come in the front door” without delay and work.

“And I think when that becomes the issue, you’ve got to focus on what are the barriers that are preventing those individuals from coming in?” Unger added. He chalked it up to housing, child care, and transit.

All three have increasingly become key issues in the Capitol, although approaches vary between parties. Legislative Republicans have argued that more transit funding would require “serious scrutiny.” The state last year spent $1.25 billion on day-to-day transit operating expenses and $650 million on larger, one-time capital expenses.

“We are for funding that will provide and produce results,” Unger said, adding, “I’d also point out that revenues today are higher than they’ve ever been.”

Shapiro has also pitched combining the Pennsylvania State System of Higher Education — or PASSHE — with the state’s community colleges under a new governing structure. He also wants to implement a new performance-based funding model for colleges and universities, including Lincoln, Penn State, Pitt, and Temple.

State Senate Republicans have also proposed performance-based funding for those four schools, known as the state-related universities. In recent years, approving state funding for those universities has been politically contentious, particularly in the state House, as approval requires a two-thirds majority.

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