The Pennsylvania Independent Fiscal Office’s most recent fiscal outlook has identified structural imbalances to the state General Fund. Pennsylvania law requires an annual balanced budget, and debt cannot be issued for operating expenses. Thus, hard decisions will need to be made.
Each November, the Pennsylvania Independent Fiscal Office (IFO) publishes its annual Fiscal Outlook for the state General Fund for the next five fiscal years. The outlook identifies permanent (i.e., structural) imbalances so policymakers have sufficient time to make informed decisions. Similar to last year, the outlook finds a large structural deficit, increasing from $5.0 billion (current year, 11% of net revenues) to $7.7 billion (FY 2030-2031, 15% of net revenues). Annual deficits are higher than last year’s outlook by roughly $1 billion, largely due to higher-than-anticipated education and health care spending, new tax credits, and future federal cost shifts related to the Supplemental Nutrition Assistance Program (SNAP). Conversely, the revenue outlook improved due to continued corporate profit and stock market gains.
As noted in the Fiscal Outlook, long-term deficit projections are hypothetical because, by statute, they cannot occur. Pennsylvania law requires an annual balanced budget, and debt cannot be issued for operating expenses. However, the projections are “real” in the sense that that they are extrapolations from the FY 2025-2026 structural deficit of $5 billion, and that shortfall is consistent with financial statements used by the Governor’s Budget Office. Under current policies, the outlook projects that spending will outpace revenue growth due to health care inflation, a rapidly expanding elderly population, new state costs related to SNAP, and the continued phased-in of the corporate net income tax rate reduction.
Past Fiscal Outlooks also projected structural deficits, but the magnitude is much larger than in years prior to the COVID pandemic. For FY 2018-2019, the estimated structural deficit was $350 million, $4.6 billion lower than the current fiscal year. A recent IFO budget brief identifies various factors that contributed to the deficit expansion: an expanding elderly population, health care inflation, an approximate $1 billion increase in tax credits, a corporate tax rate reduction, the backfill of prior funding from the Motor License Fund for State Police (roughly $500 million), and a new transfer from sales tax revenues to the Public Transportation Trust Fund (PTTF, $560 million for current year). The COVID-era federal stimulus funds – received directly by the state ($26 billion) or businesses and residents (roughly $130 billion) in the form of Paycheck Protection Program (PPP) forgivable loans, Economic Impact Payments and special unemployment programs (e.g., FPUC, PUA) – provided a temporary surge in revenues and a windfall to the state’s General Fund surplus and Rainy Day Fund. The forecast projects those funds under current policies will be nearly depleted next year.
The fiscal imbalance will be difficult to rectify. Most General Fund spending is largely mandatory (56%) or used for pre-K through 12 education (36%) and is unlikely to be cut. Recent proposals to legalize marijuana and tax skill games could generate considerable revenues, but it would likely be under $1 billion combined, and some proposals use those monies for non-General-Fund purposes.
For current state taxes, only sales or personal income tax is large enough to provide meaningful revenue without a significant rate increase. For sales tax, Pennsylvania ranks 40 (No. 1 being the highest) in the state and local sales tax burden (ratio of sales tax paid to total state income) across all states because the state has a narrow tax base. For example, the state exempts several goods commonly taxed by other states, such as clothing (38 states levy tax), nonprescription drugs (35 states), and candy and gum (28 states). For services, the list includes amusement parks and recreation (31 states levy tax), professional spectator sports (30 states), and live nonsport entertainment (30 states). For personal income tax, Pennsylvania ranks 16 in the state and local tax burden. Although Pennsylvania has a relatively low, flat tax rate, all local units also levy an earned income tax. The tax code does not allow personal deductions or exemptions, but does have provisions for tax forgiveness and a new Working Pennsylvanians Tax Credit that provide targeted relief to low-income filers.
By the end of FY 2025-2026, the General Fund surplus will be nearly depleted, but the $7.8 billion Rainy Day Fund should remain intact. Per statute, those monies can only be used under specific circumstances: a distribution from the Rainy Day Fund upon request of the governor requires legislative approval (two-thirds majority) and it can only be used for emergencies involving the health, safety, or welfare of Commonwealth residents or economic downturns resulting in significant unanticipated revenue shortfalls that cannot be addressed through the regular budget process. The governor’s budget release in February 2026 will provide insights into how he proposes to deploy that resource. Keep an eye on PICPA’s Legislative Update for an overview of the governor’s next spending plan.
Matthew Knittel has served as director of the Pennsylvania Independent Fiscal Office since its creation in 2011. Prior to his tenure, he was a financial economist for the U.S. Treasury Department and Michigan Department of Treasury. He received a PhD in economics from Michigan State University. He can be reached at mknittel@ifo.state.pa.us.
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Statements of fact and opinion are the author's responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.
