3.4.26 - Senate Revenue Budget Hearing Overview

Pennsylvania Senate Budget Hearing

Issue-by-Issue Breakdown (Department of Revenue & Governor’s Budget Office)

Hearing Context and Overview

• The Senate Appropriations Committee convened a budget hearing with the Governor’s Budget Office and Department of Revenue to review the revenue assumptions underlying Governor Josh Shapiro’s proposed FY 2026–27 state budget.
• The governor’s proposal totals approximately $53.3 billion, an increase of $2.7 billion (5.4%) from the revised current-year budget.
• Testifying witnesses included the Budget Secretary, Secretary of Revenue, and senior leadership from the Department of Revenue and Pennsylvania Lottery.
• Committee leadership emphasized the importance of scrutinizing revenue projections and policy proposals that the administration is relying on to balance the proposed spending plan.

Major Fiscal and Policy Issues Discussed

1. Overall State Revenue Outlook and Budget Assumptions

Key Budget Figures

• The governor’s proposed General Fund budget is approximately $53.3 billion.
• This represents a $2.7 billion increase over the current fiscal year.
• The Department of Revenue budget request is approximately $232 million, while the Governor’s Budget Office requested about $27.5 million.

Legislative Concerns

• Senators questioned whether the administration’s revenue assumptions are realistic given economic uncertainty.
• Particular scrutiny was given to proposed new revenue streams that have not yet been enacted by the legislature.

Administration Response

• Budget officials stated that the executive branch must present revenue options to close projected gaps between expected revenues and proposed expenditures.
• Officials emphasized that the final revenue mix will ultimately be determined through negotiations with the General Assembly.

2. Recurring Revenue Proposals in the Governor’s Budget

A major line of questioning focused on several repeated policy proposals that the administration has included in multiple recent budget proposals.

Key Proposals Discussed

• Adult-Use Cannabis Legalization
• Regulation and Taxation of Skill Games
• Corporate Tax Reform through Combined Reporting

Legislative Feedback

• Senators noted that these proposals have appeared in previous budgets without being enacted.
• Committee leadership described the situation as a recurring “rinse and repeat” strategy in the administration’s budget proposals.

Department Response

• Revenue officials acknowledged that none of these proposals have yet passed both chambers.
• Officials stated that conversations are ongoing with legislative leaders on skill game regulation and cannabis policy.
• They argued these policies would:
  • Generate new revenue for the state
  • Address currently unregulated markets
  • Reduce economic activity flowing to neighboring states.

3. Educational Improvement Tax Credit (EITC) Program Administration

Issue Raised

Lawmakers previously expressed concerns about delays in issuing EITC refunds to businesses participating in the program.

Improvements Implemented

Revenue officials reported several operational improvements:

• More frequent coordination with DCED, including weekly communication on program eligibility.
• Expanded electronic filing capabilities, allowing businesses to submit forms digitally.
• Improved outreach to participating organizations regarding filing requirements.

Outcome

Officials reported that these changes have significantly improved refund processing timelines and that no statutory changes are currently needed.

4. Trends in Tax Refunds and Revenue Forecasting

Legislative Concern

Committee members highlighted a significant increase in the amount of tax refunds issued by the state and asked why refunds are rising.

Department Explanation

Revenue officials said the trend is largely driven by:

• Overpayment of estimated taxes, particularly by businesses anticipating higher profits than they ultimately realize.
• Increased payroll withholding tied to wage growth, which can lead to larger refunds for taxpayers.

Additional Issues Raised

• Senators asked how much interest the state pays when refunds are issued late.
• Revenue officials said they are continuing efforts to accelerate processing but did not have an exact interest figure available during the hearing.

5. Property Tax/Rent Rebate Program Expansion

Program Background

The Property Tax/Rent Rebate Program provides financial relief to eligible seniors and residents with disabilities.

Participation Changes

Officials explained that prior to recent reforms:

• Participation had declined from approximately 500,000 beneficiaries to around 300,000 due to inflation pushing individuals above eligibility thresholds.

Following program expansion:

• Participation has returned to more than 500,000 recipients.

Financial Impact

• The most recent program year distributed approximately $316 million in rebates.

Structural Improvement

• Eligibility thresholds now include cost-of-living adjustments, preventing future erosion of program participation.

6. Critical Infrastructure Fund Proposal

Governor’s Proposal

The administration proposed creating a Critical Infrastructure Fund totaling approximately $1 billion over four years.

Intended Investment Areas

The fund is designed to support:

• School building improvements
• Housing construction and rehabilitation
• Energy infrastructure and grid expansion

Policy Rationale

Administration officials argued that these investments are intended to:

• Improve Pennsylvania’s economic competitiveness
• Address housing shortages
• Strengthen energy capacity needed for economic development.

7. Property Tax Relief Fund and Gaming Revenue

Overview

Pennsylvania’s Property Tax Relief Fund distributes revenue generated by gaming to provide property tax reductions through the homestead and farmstead exclusion program.

Key Figures

• Last year marked the first time annual distributions exceeded $1 billion.
• The administration expects to certify approximately $1.025 billion again in the upcoming fiscal year.
• Since its creation, the program has delivered approximately $13 billion in cumulative property tax relief.

Legislative Perspective

Members emphasized the importance of maintaining gaming revenue streams that support property tax relief.

8. Federal Tax Policy Changes and State Decoupling

Issue Raised

Senators asked about the impact of recent federal tax law changes and Pennsylvania’s decision to decouple certain provisions from federal tax rules.

Reason for Decoupling

Revenue officials explained that adopting certain federal tax provisions could result in approximately $1 billion in lost state revenue.

Key Federal Provisions Affecting State Taxes

Officials cited several areas of concern:

• Research and Development (R&D) tax deductions
• Interest expense limitations
• Qualified production property provisions.

Ongoing Analysis

The Department of Revenue is preparing a report evaluating:

• The fiscal impact of these federal changes
• Potential policy responses for Pennsylvania.

9. Retirement Account Withdrawal Tax Policy

Issue Raised

Recent federal changes allow expanded early withdrawals from retirement accounts, including for childbirth or adoption expenses.

Legislative Proposal

A senator indicated plans to introduce legislation to eliminate Pennsylvania taxation on these early withdrawals.

Department Response

Revenue officials agreed to evaluate the proposal as part of their broader analysis of federal tax policy impacts.

10. Tax Credits Supporting Working Families

Working Pennsylvanians Tax Credit

Officials described this credit as one of the most significant changes to Pennsylvania’s tax structure for working families in decades.

Key statistics discussed:

• 300,000+ tax returns filed claiming the credit so far
• Over $100 million in benefits approved
• Expected $193 million total program impact
• Nearly 1 million Pennsylvanians projected to benefit

Child and Dependent Care Tax Credit

Participation has also been strong for the expanded child care credit:

• More than 200,000 taxpayers received benefits
• Approximately $8 million in benefits distributed.

Officials noted the expansion increased the credit from 30% to 100% of the federal credit, significantly increasing its value.

Major Themes Emerging from the Hearing

1. Reliance on Unenacted Revenue Sources

Several senators expressed concern that the proposed budget relies on policy changes—such as cannabis legalization and skill game taxation—that have not yet been approved.

2. Tax Relief Programs as Key Policy Tools

Programs such as the Property Tax/Rent Rebate Program and the Working Pennsylvanians Tax Credit were highlighted as major mechanisms for providing relief to residents.

3. Federal Tax Policy Uncertainty

Changes at the federal level are creating uncertainty for Pennsylvania’s tax structure and may require additional policy adjustments in the future.

4. Continued Debate Over Revenue Modernization

Discussions around combined reporting, gaming regulation, and cannabis legalization suggest ongoing debates about modernizing Pennsylvania’s revenue system.

Bottom Line

The Senate budget hearing underscored the central fiscal challenges facing Pennsylvania as lawmakers consider the governor’s proposed $53.3 billion budget.

Key debates focused on:

• The reliability of proposed revenue sources
• The expansion of tax relief programs
• The potential fiscal impact of federal tax changes
• Long-term strategies for maintaining sustainable state revenues.