When Governor Josh Shapiro was sworn into office in January 2023, he inherited a Commonwealth with an $8 billion surplus. With the final FY 2024-25 budget now in place, the surplus will be reduced to a little more than $3 billion by June 30, 2025, and will be completely gone in the next fiscal year thereafter. 

The General Fund surplus is being depleted largely due to Pennsylvania’s structural deficit – in other words, state recurring expenses continue to exceed state recurring revenues. Structural deficits have major consequences for Pennsylvania’s finances and, ultimately, for Pennsylvania taxpayers. Given recent economic data and the dire financial direction of the Commonwealth, it’s essential now more than ever to provide a factually complete account of revenues and expenditures. 

The cause of this financial mismanagement is no mystery and has been well-documented by House Republicans for several years. Many of the warnings and concerns shared by House Republicans were echoed and confirmed by outside watchdog groups and the nonpartisan Independent Fiscal Office (IFO).

As a refresher, the Commonwealth has carried a budget surplus in recent fiscal years due to an influx in federal funds from various federal Covid-19-related spending programs, not exceptional economic growth or overtaxing hardworking Pennsylvanians. The IFO analyzed budget and revenue growth over a five fiscal year period, starting with FY 2018-19 (i.e. before the pandemic), and compared it with FY 2023-24, the last year pandemic-related federal dollars were infused into the state budget. Their findings: spending increased by 33 percent, but revenue increased by only 30 percent. 

Spending exceeding revenues is a concern in itself, but equally as important to examine are the areas of strong revenue growth (or lack thereof). For example, non-tax revenue increased 102 percent, mainly due to investment returns on the now dwindling General Fund surplus. The corporate net income tax (CNI) increased by 66 percent; however, this growth is likely unsustainable as the bipartisan CNI rate reduction and increase of net loss deduction continues. Another area of growth was the inheritance tax, which grew 56 percent, a rather morbid revenue source to prop up spending. The analysis showed that personal income and sales and use taxes grew by an average of 26 percent and 29 percent, respectively. These two tax categories account for the vast majority of our state revenues. 

With this five-year trend in mind, it’s important to examine the most recent complete revenue picture, FY 2023-24. The best indicator of revenue growth analysis is a year-over-year review. House Democrats are touting that General Fund revenues exceeded the official estimate by over $800 million, a completely factual claim but not factually complete. Year-over-year growth (FY2023-24 v/s FY2022-23) in the General Fund was only 1.2 percent, hardly enough to keep up with spending that grew at a rate of 5.8 percent. However, this 1.2 percent figure is only part of the picture. Tax revenue only grew by 0.2 percent year-over-year, meaning that non-tax revenue is driving total General Fund revenue. As mentioned in the five-year analysis, non-tax revenue is primarily driven by surplus investments from the Treasurer’s office, a surplus we will soon no longer have as the Governor and House Democrats continue their spending spree. 

Equally important to examining state revenues is taking an even closer look at state spending. The FY 2024-25 budget spends a total of $47.6 billion, representing an increase in state appropriations by $2.7 billion, or 6.0 percent, over the prior fiscal year. Human Services and Education account for 81% of General Fund spending in FY 2024-25. When corrections, state police, and debt service are added, 92 percent of the state spending is accounted for. This leaves the General Assembly, Judiciary, agencies such as DEP, DCNR, Labor and Industry, and DCED all funded within 8 percent of the total budget. 

The IFO five-year review on the pandemic’s impact on spending showed Human Services spending grew 41 percent, while Education grew 27 percent. The Average Annual Growth Rate for General Fund spending from fiscal years 2018-19 to 2023-24 was 5.9 percent. The Average Annual Dollar Increase over that same period was $2.225 billion. Since Governor Shapiro took office, total General Fund spending has increased by $4.64 billion, an average annual increase of 5.3 percent. Again, it is worth noting that Shapiro also inherited an $8 billion surplus, which will be gone before the close of FY 2025-26. 

The Commonwealth did not reach this financial instability overnight. State spending has been on a steady upward trend since FY 2012-13, but the consequences of the structural deficit will need to be dealt with in the next budget cycle. We have four real options: raid the Rainy Day Fund (which is solely for emergencies), raise taxes, cut spending, or use budget gimmicks to “balance” the budget. Which consequence will we choose?

Seth Grove represents PA’s 196th Legislative District in York County.  He is the Republican Chairman of the House Appropriations Committee and has a master’s degree in Public Financial Management from the University of Kentucky.