3.10.26 - House Revenue Budget Hearing Summary

Pennsylvania House Budget Hearing

Department of Revenue and Pennsylvania Lottery – Detailed Overview / Notes

I. Opening and Hearing Context

A. Opening of the hearing

• The hearing opened with the committee welcoming officials from the Department of Revenue and the Pennsylvania Lottery. The chair noted the Lottery’s long-running public identity as a funding source that “benefits older Pennsylvanians,” and Chairman Struzzi emphasized the importance of the hearing because revenue estimates help shape the final state budget.

II. Budget Overview: Department of Revenue and Lottery

A. Revenue budget request

• Chairman Struzzi stated that the Governor is proposing a $232.1 million General Fund budget for the Department of Revenue for the coming fiscal year.
• That represents an increase of approximately $14.1 million, or about 6.5%, over the current year.

B. Lottery Fund spending

• The committee also noted that the Lottery Fund is projected to expend about $2.3 billion, an increase of roughly $48 million, or about 2.2%, over the current year.

C. Broader budget context

• Chairman Struzzi framed the discussion within the Governor’s larger budget plan, highlighting concern about:
  • use of the Rainy Day Fund,
  • reliance on surplus revenues,
  • and the importance of accurate long-range revenue projections for budget negotiations.

III. Governor’s Major Revenue Proposals

A. Overview of the administration’s new revenue package

One of the first lines of questioning focused on the Governor’s larger tax and policy proposals, especially how much revenue they would generate if enacted.

Estimates for FY 2026–27

The administration’s current-year estimates are approximately:

• Adult-use cannabis: about $730 million total, including taxes and fees; he said the full-year annualized amount would be about $287 million, “mostly taxes.”
• Video gaming terminals / skill games proposal: about $766 million, including about $22 million in fees.
• Combined reporting / corporate tax change: about $328 million for the budget cycle.

He then agreed with the questioner’s framing that the package represented about $1.8 billion in total potential revenue for FY 2026–27 if enacted.

B. Why the administration keeps proposing these items

• Brown explained that when available current revenues and surplus funds are insufficient to support proposed spending, the administration has a statutory obligation to identify new revenues.
• He defended proposals such as adult-use cannabis and skill game regulation as “common sense” policy choices that would not only raise money but also address:
  • unregulated markets,
  • economic activity already occurring,
  • and cross-border purchases in neighboring states.

IV. Adult-Use Cannabis Legalization

A. Structure of the proposal

• Members questioned the Governor’s proposal to legalize adult-use cannabis beginning January 1, 2027, using a 20% wholesale tax in addition to the regular sales and use tax.

B. Coordination with other agencies

• Revenue testified that implementation would require close coordination with:
  • the Department of Agriculture,
  • the State Police,
  • the Department of Health,
  • and other enforcement agencies.

C. Implementation readiness

• Secretary Brown said the department believes there is sufficient time between now and January 1, 2027 to establish the regulatory, licensing, and tax systems needed for implementation because Pennsylvania already has an existing medical cannabis infrastructure.
• He specifically noted that the initial adult-use rollout would likely rely heavily on existing dispensaries, which would make implementation easier than building an entirely new market from scratch.

D. Statutory vs. regulatory framework

• Brown said Revenue would work with the General Assembly to help shape the statutory structure, and that the regulatory structure would follow after enabling legislation is adopted.

E. Revenue estimates vs. broader costs

• One member pressed the department on whether it had estimated not just the tax revenue, but also the cost to counties, courts, district attorneys, and local police.
• Brown responded that Revenue’s current work had focused on the static revenue estimate for the state budget and had not yet modeled local enforcement or local fiscal impacts. He said the department could try to do that if asked, but had not done so yet.

F. Revenue forecast methodology

• In response to skepticism about the state’s projected cannabis revenues, Brown said Revenue had benchmarked Pennsylvania’s assumptions against other states, including growth patterns observed in places like Colorado, and was confident in the accuracy of the projections based on existing state models.

V. Skill Games, Video Gaming Terminals, and Gaming Tax Equity

A. Core question: 40,000 machines vs. 20,000 licensed

• Representative Barton asked for clarification about the Governor’s statement that the Gaming Control Board would regulate 40,000 total combined machines across establishments.
• Brown clarified that:
  • the 40,000-machine figure refers to the full-year 2027–28 scenario,
  • while the FY 2026–27 estimate assumes only 20,000 machines are licensed during the initial year.

B. Establishments

• Brown testified that the administration’s assumptions contemplated about 9,000 establishments for the full-year model.

C. Policy rationale for the 52% tax rate

• Revenue defended the Governor’s proposal to subject skill games to the same 52% tax rate currently applied to VGT-type gaming activity.
• Brown framed the issue as one of tax fairness and consistency, saying it is difficult to justify having one gaming machine inside a truck stop taxed while another nearby machine offering cash play is taxed at zero.

D. Economic impact concerns

• Members from rural districts raised concerns that taxing skill games at 52% could harm:
  • small family businesses,
  • restaurants,
  • fire companies,
  • American Legions,
  • and other local establishments that rely on skill game revenue.
• Brown acknowledged Revenue did not have a formal study on the local economic effect of the proposed tax rate, but said the department believed the machines could sustain taxation comparable to similar gaming devices already operating in other settings.

E. Skill games and Lottery retailer recruitment

• Lottery officials later added that regulation of skill games could actually help the Lottery recruit more retailers, because VGT locations are already required by law to be Lottery retailers.
• They said bringing games of skill into a similar framework could expand the Lottery’s retail footprint significantly.

VI. Corporate Tax Reform and Combined Reporting

A. Millionaire’s tax and uniformity constraints

• Members asked whether Pennsylvania could impose a millionaire’s tax similar to what Massachusetts adopted.
• Brown said the primary barrier is Pennsylvania’s uniformity clause, which has long been interpreted to mean that individuals in the same tax class must be taxed at the same rate regardless of income.
• He said a wealth-based rate structure would face serious constitutional obstacles under Pennsylvania law.

B. Corporate tax modernization

• Brown then shifted to the corporate side, explaining that Pennsylvania can do more to ensure corporations pay what he described as their fair share.

Key concepts discussed:

• Add-back provisions to address intercompany transactions that lack economic substance
• Combined reporting, which would require a corporate control group to report income together
• Elimination of artificial income shifting among related entities
• Continued alignment with the state’s move toward single-sales-factor apportionment.

C. Rationale for combined reporting

• Brown argued that businesses operate as integrated groups, not as isolated legal silos, and that Pennsylvania’s tax structure should reflect how corporations actually operate.
• He presented combined reporting as the next major step in modernizing the Commonwealth’s corporate tax system.

VII. Digital Economy Taxation

A. Digital ad tax discussion

• Members asked whether Pennsylvania is missing revenue opportunities by not taxing digital advertising the way Maryland does.
• Revenue’s tax policy staff responded that Pennsylvania already taxes many digital goods and software, especially after changes made by Act 84 of 2016, but Pennsylvania does not currently have a separate digital advertising tax.

B. Existing digital tax collections

• Staff testified that Pennsylvania’s current taxation of software and digital goods generated approximately $1.7 billion in the last fiscal year, including online purchases and software-related taxable activity.

C. Additional proposals

• Revenue said that if the legislature proposed a digital ad tax, the department could score it and estimate the additional revenue, but no such tax currently exists in state law.

D. Department’s broader view

• Brown stressed that, without changes made over the past decade to modernize digital taxation, the General Fund would be short by billions compared to its current position. He cited e-commerce, streaming, software, and other digital activity as major reasons Pennsylvania’s tax base has held up better than it otherwise would have.

VIII. Pennsylvania Lottery Operations and iLottery

A. Lottery growth strategy

Lottery leadership testified that the Lottery is using several strategies to continue growing revenue for programs benefiting seniors:

• optimizing the game portfolio,
• launching new draw games,
• using recent profit margin relief on scratch-offs to improve payouts,
• expanding the retailer network,
• modernizing systems and equipment,
• and growing online services.

B. Scratch-off and retailer strategy

• Lottery leadership said the profit margin relief enacted last year has already begun producing signs of renewed growth in scratch-off sales.
• They also referenced active efforts to expand the Lottery’s retail distribution network, including large chain opportunities identified in the broader summary such as CVS and Walgreens.

C. iLottery status

• Lottery officials testified that online lottery has been active since 2018 and includes:
  • draw games,
  • more than 200 internet instant games,
  • and subscription-based offerings.
• They emphasized that the majority of sales still occur through retail outlets, but that iLottery is an important incremental source of revenue and profit.

D. Court case and legal risk

• The most significant Lottery policy concern raised at the hearing was the ongoing litigation over iLottery and casino-style gaming.
• Lottery officials testified that:
  • casinos sued the Lottery soon after the online launch in 2018,
  • the litigation has been ongoing for nearly eight years,
  • a Commonwealth Court decision in January forced the Lottery to remove two long-standing games,
  • and the case has now been appealed again to the Pennsylvania Supreme Court.

E. Legislative request

• Lottery leadership said the General Assembly could help by clarifying language in Act 42 of 2017, particularly the language dealing with games that “simulate” casino-style products.
• They stressed that Pennsylvania is the only U.S. lottery selling online that has this particular restrictive language in its law, and asked lawmakers to strike or revise it to protect the Lottery’s online revenue stream.

F. Market share

• Lottery officials testified that iLottery makes up only about 1% of Pennsylvania’s regulated online gambling market, underscoring their argument that the Lottery is not crowding out the broader casino industry.

G. Pressure on the Lottery Fund

• Later in the hearing, Revenue officials explained why the Lottery Fund is under increasing strain:
  • Pennsylvania now has the largest total gaming volume in the country,
  • the Lottery is competing in a much more crowded gaming environment than it was 20 years ago,
  • and significant unregulated gaming activity is creating new pressure on Lottery revenues.

IX. Property Tax/Rent Rebate Program and Property Tax Relief Fund

A. Property Tax/Rent Rebate expansion results

• Members asked about the success of the 2023 expansion of the Property Tax/Rent Rebate Program.
• Brown testified that before the expansion, claimant participation had fallen into the mid-300,000 range because income limits had not been raised for many years.
• Following expansion, the department processed more than 550,000 applications, representing roughly 165,000 more claimants, and projected about $316 million in payments to more than 500,000 claimants.

B. Inflation indexing and outreach

• Brown said one of the most important changes was that the program now avoids losing eligible claimants simply because of inflation.
• He also said the department has shifted from assuming eligible people will apply on their own to actively identifying and contacting likely eligible populations, including through cooperation with DHS and other agencies.

C. Property Tax Relief Fund balance and use

• Members also questioned the balance of the Property Tax Relief Fund and whether additional relief could be provided.
• Brown testified that:
  • the fund is now supporting the highest homeowner relief level ever,
  • along with about $116 million on the tax/rent rebate side,
  • and that the department must be careful not to “over-strip” the fund without forecasting its long-term sustainability.
• He said that if a genuine long-term surplus exists, the possibility of additional relief could be considered.

D. Fire company transfer controversy

• A member challenged the Governor’s continued proposal to direct $30 million from the Property Tax Relief Fund to fire companies.
• Brown responded that support for fire companies from that fund has existed “since the beginning” as a relatively modest share compared to the overall size of the fund, and he rejected the characterization that the Governor was broadly diverting property tax relief dollars away from their original purpose.

X. EITC and Tax Credit Processing Improvements

A. EITC processing concerns

• Members said constituents had complained about the time it takes to process returns claiming the Educational Improvement Tax Credit (EITC).

B. Revenue’s response

Brown testified that the department has achieved its fastest processing times since the inception of the credit, even though the EITC program is now over $600 million.

C. Specific steps taken

He listed several improvements:

• better weekly information sharing with DCED,
• creation of a Special Credit Division within the Bureau of Income Taxes,
• assignment of 12 staff members specifically to credits,
• more communication with outside groups about filing timelines,
• and electronic filing for the allocation report form 1123, replacing slower manual processing.

D. Further acceleration options

• Brown said one of the biggest factors still slowing processing is that many entities claim the credits on extended tax returns, often not filed until the fall.
• He suggested that if the General Assembly ever required participants in these credit programs to file by the original due date rather than the extended due date, that alone could accelerate credit awards by roughly six months.

XI. Minimum Wage, Wage Trends, and Revenue Effects

A. Legislative challenge to the minimum wage estimate

• A member cited the Minimum Wage Advisory Board’s 2025 report, noting:
  • 81.4% of wage and salary workers were already earning more than $15 per hour,
  • only 7.8% earned less than $12 per hour,
  • and the statewide median wage had risen to $20.95 per hour.

B. Revenue estimate

• The member then pressed Brown on why the department still estimated roughly $53.5 million in new revenue from a minimum wage increase in the upcoming fiscal year, compared with $51.5 million last year.

C. Department explanation

• Brown acknowledged that the future out-year impacts are lower because the number of minimum wage workers is shrinking.
• He also emphasized, however, that Revenue’s data still shows more than 500,000 workers in jobs paid at the $7.25 minimum wage, and argued that Pennsylvania has failed to update the minimum wage since 2009 and the tipped wage since 1997.

XII. Department Administration, Staffing, and Taxpayer Support

A. Taxpayer Rights Advocate

• Members asked about the Office of the Taxpayer Rights Advocate.
• Brown said the office was created by statute in 1998 to give taxpayers another avenue when their concerns do not fit neatly into normal compliance or enforcement channels.
• He described it as “tremendously successful,” saying:
  • it has been handling more than 100 cases per month for the last 60 months,
  • closed roughly 30,000 cases over time,
  • and also supports low-income tax clinics working with law schools and community organizations.

B. Vacancies and recruiting

• The department’s vacancy rate had fallen from 14.5% in January 2023 to about 8.6% currently, with around 100 positions filled or in process.
• Discussion of active recruiting methods, including:
  • school outreach,
  • job fairs,
  • coordination with the Office of Administration,
  • LinkedIn and alumni outreach,
  • and other targeted hiring tools.

C. Customer service modernization

• Brown said the department is trying to make notices more understandable in plain language and is increasingly focused not only on collecting taxes, but also on identifying residents who may qualify for benefits and contacting them proactively.

D. REMAP review and Lottery staffing

• Brown said the REMAP process recommended 10 additional Lottery staff to support field operations and retail expansion, and that those positions are included in the Governor’s budget proposal.

XIII. Revenue Forecasting and Out-Year Assumptions

A. Revenue growth outlook

• Members asked whether the department’s growth assumptions were realistic given the state’s structural budget concerns.
• Brown said the strongest parts of the revenue base—sales tax and personal income tax—are currently showing growth in the 3–4% range, which he described as relatively strong.

B. Corporate tax cuts and economic competitiveness

• Brown argued that reducing the Corporate Net Income Tax rate should make Pennsylvania more competitive over time, ideally increasing:
  • investment,
  • consumer activity,
  • and personal income growth.
• He acknowledged, however, that those effects are still too early to model with confidence.

C. Major revenue risk

• Brown flagged one major concern on the PIT side: strong recent growth in non-withheld personal income tax, which he said may be exposed to a potential capital markets correction or even an AI-related bubble in the markets.

D. Department operating budget growth

• On spending for Revenue itself, Brown said the department’s request is largely a cost-to-carry budget, driven by:
  • workforce maintenance,
  • union contract increases,
  • healthcare costs,
  • and annual software maintenance and enhancements.
• He said the proposed operations budget is intended mainly to sustain current services rather than expand them dramatically.

E. IFO comparison

• A member raised concern that department estimates were far off from the Independent Fiscal Office.
• Brown pushed back, saying the revenue estimates were actually only about $46 million apart, which he characterized as about one-tenth of one percent on a roughly $50 billion revenue base. He presented that close tracking as evidence of forecast credibility.

XIV. Overall Themes and Takeaways

A. Major policy debate areas

The hearing repeatedly returned to several core policy fights:

• adult-use cannabis legalization,
• skill games taxation and regulation,
• combined reporting and corporate tax modernization,
• Lottery survival in a crowded and partially unregulated gaming market,
• and the need for continued outreach on property tax and rebate programs.

B. Heavy emphasis on legislative clarity

• Witnesses repeatedly stressed that many of the Governor’s proposals cannot move forward through agency action alone.
• They will require clear statutory language from the General Assembly, especially on:
  • cannabis structure,
  • skill games,
  • iLottery / casino coexistence,
  • and corporate tax filing changes.