Shapiro pitches legal cannabis, regulated skill games in budget that bumps education spending by $2.2B

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Kate Huangpu of Spotlight PA contributed to this article.

HARRISBURG — In his annual budget address Tuesday, Gov. Josh Shapiro unveiled a $48.3 billion spending plan that proposes to significantly increase funding for public education and legalize recreational marijuana.

The Democrat’s plan draws on the state’s $14 billion in cash reserves, and would use about $2 billion to offset new K-12 and higher education spending. To raise additional revenue, Shapiro wants to tax legal marijuana, and regulate and tax slots-like machines called skill games that are common in bars and restaurants statewide.

Those new dollars would also help pay for additional spending on public transit, economic development, housing, and health care, among other priorities.

“We can’t afford not to invest right now,” Shapiro said before a crowd in the Capitol rotunda, which is this year’s unusual venue for the budget address because of a leak in the state House chamber.

The major spending proposals mark a new chapter for Shapiro, who in his first address proposed keeping costs relatively flat.

The first-term governor’s spending measures could be difficult to herd through Pennsylvania’s divided legislature.

Critics say Shapiro’s plan, a roughly 7% increase over current general fund spending, isn’t sustainable, as it draws on the state’s reserves — a nonrecurring source built up over the past four years due to a mix of federal aid and higher-than-expected tax revenues during the pandemic.

By the administration’s own estimates, those reserves will be almost exhausted by 2029, assuming no new major spending in future budgets.

Republican legislative leaders said the plan was fiscally irresponsible and would deplete the state’s resources. State Senate President Pro Tempore Kim Ward (R., Westmoreland) called it “a budget of unicorns and rainbows.”

The governor must get buy-in from the Republican-controlled state Senate to pass any proposals. Absent from his budget pitch are programs designed specifically to curry GOP favor — most notably, a taxpayer-funded private school voucher program that Shapiro championed, then backed off of, during last year’s nearly six-month budget fight.

He alluded to the proposal during his budget address, saying that 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.”

That kind of initiative, he said, is something he supports and considers “to be unfinished business.”

Serious K-12 education spending

Through a mix of new funding and changes to charter school financing, Shapiro’s plan would provide almost $1.86 billion in new money for preschool and K-12 education — almost doubling his $1 billion education spending pitch from last year.

Education has been a Harrisburg priority since Commonwealth Court ruled early last year that Pennsylvania’s public school funding system was unconstitutionally inequitable and must be fixed.

Shapiro’s budget proposes about $1 billion in new state aid that would flow directly to public K-12 school districts. Of that total, $200 million would be routed through an existing funding formula that distributes money based on factors like district size and poverty, while $872 million would go to districts found to be “inadequately funded.”

Shapiro administration officials said Tuesday that the legislature would define which schools meet that bar.

The concept of “adequacy,” or the amount of money a district needs to educate students at an acceptable level, was central to a report released by a bipartisan group of lawmakers in January after months of hearings around the state.

The final report was approved by the commission’s Democrats, including members of the Shapiro administration. It recommends at least $5.4 billion in direct aid to K-12 schools over the next seven years, plus billions more for property tax relief, mental health, school building repairs, and other education spending.

Public education advocates emphatically supported the plan. PA Schools Work, a statewide coalition of pro-school-funding groups, called it “a public education budget worth fighting for” in a statement.

The Pennsylvania State Education Association, the state’s largest teachers union, said in a statement that Shapiro’s budget was “a solid beginning to a multiyear process.”

Another $525 million in new education spending would be spread between initiatives big and small, such as funding school mental health programs, enabling districts to fix and upgrade their buildings, increasing special education spending, and giving students access to free period products.

The budget also proposes capping cyber charter tuition at $8,000 per student, which the administration projects would save school districts $262 million each year.

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New revenue sources: Skill games, marijuana, raising the wage

Pennsylvania is spending money faster than it’s taking it in, and onlookers across the political spectrum have acknowledged that funding education to satisfy the court ruling will quickly deplete the budget surplus.

Shapiro isn’t calling for broad sales or income tax hikes in this budget. Instead, he’s turning to what are commonly known as “sin taxes” — in this case, on a new sector of gaming and recreational marijuana.

The legalization of marijuana is a long-held priority for many lawmakers. While there are both Democratic and Republican supporters, the issue has repeatedly stalled out in the legislature.

Meredith Buettner, executive director of the Pennsylvania Cannabis Coalition, an industry group, said Shapiro’s call for action signals that he views legalization as a priority.

Shapiro’s budget does not endorse a specific legalization plan, but it does call for a 20% tax on recreational marijuana sales. In their written explanation of the budget, administration officials called for revenue from the program to go toward “restorative justice initiatives” as well as the Department of Agriculture and State Police, with the rest heading to the state’s General Fund.

The plan assumes legal sales would start in January 2025 and yield about $14.8 million in the industry’s first year of operation. Revenue would likely increase after that — Shapiro put the price tag at more than $250 million in annual tax revenue once the industry is off the ground.

Despite a growing embrace of marijuana legalization in the legislature, the effort faces tough odds, particularly in the GOP-controlled state Senate. Ward, the chamber’s top leader, has said that she will not support legalization until the federal government ends cannabis prohibition.

Still, Buettner said there are GOP allies in both chambers, adding that a “real policy conversation will hopefully reveal even more supporters from the right side of the aisle.”

Such a complicated issue will require thorough work, Buettner said, particularly on an issue that cleaves party lines. Such details will require careful examination, and not just a last-minute rush as is typical of Harrisburg lawmaking.

“I’m not sure we can wait until May or June and deliver by July 1st,” Buettner said.

Shapiro’s proposal also wades into a complicated battle between competing factions of Pennsylvania’s gaming industry.

The governor wants to regulate and tax skill games, which resemble slot machines and can be found in bars, restaurants, and convenience stores across the commonwealth.

These terminals exist in a regulatory vacuum. Commonwealth Court ruled last year that skill games are not currently subject to regulation or taxation under Pennsylvania’s Gaming Act, as gameplay involves some level of skill, rather than pure chance.

Shapiro is proposing a 42% tax on daily gross revenue from these skill games, which he estimates would yield about $150.4 million for the state in the next fiscal year. As with cannabis, this number would likely grow over time.

The third significant source of new revenue in the budget is a perennial Democratic priority: increasing Pennsylvania’s minimum wage from the federal floor of $7.25 an hour to $15 an hour.

Shapiro estimates that this increase would result in over $56 million in new tax revenue from the higher wage in the next fiscal year.. That estimate assumes the $15 minimum wage is implemented in January 2025, so projected revenue would be higher in subsequent years.

But this proposal also faces political headwinds.

State Senate Majority Leader Joe Pittman (R., Indiana) said this summer he is open to raising the minimum wage, but that $15 an hour is “not a practical number.”

Altogether, the administration predicts that a new skill games tax, a tax on recreational marijuana, and additional sales and income tax dollars from an increased minimum wage would bring in about $222 million in the upcoming fiscal year.

Within about five years, the administration expects the total for those three proposed revenue sources to grow as salaries increase, the marijuana industry expands, and regulation of skill games solidifies. However, Shapiro administration officials acknowledged at a briefing with reporters before the address that current spending outstrips even those mature projected revenues.

During a news conference following the address, Pittman said members of his caucus are interested in regulating skill games and that “it’s probably time that we bring that issue to the table.” He said support for legalizing marijuana would be dependent on how the legislature enacted the change.

He went on to call the overall budget plan “absolutely fiscally irresponsible and unsustainable.”

“If [the governor] wants to get rid of our surplus and rainy day fund, we should then return it to the people who gave it to us in the first place,” Pittman said.

In his address, Shapiro argued that it would do a disservice to Pennsylvania if he didn’t spend some of that money.

“Look, it is not a badge of honor, nor is it something to be politically proud of for some lawmakers out there to say: I took more money from the good people of Pennsylvania than I needed and then bragged about how I just kept it in some bank account here in the Capitol,” Shapiro said.

Legislative Democrats also backed Shapiro’s proposals, from free period products for students to a minimum wage hike, calling them a bold attempt to invest in the commonwealth.

Looking at the Republican-controlled upper chamber, state House Majority Leader Matt Bradford (D., Montgomery) said that “doing nothing and obstructing is not a response to what the governor has laid out today.”

Transit, education, and ‘unfinished business’

Shapiro’s formal pitch on Tuesday provided more details about some significant proposals he announced ahead of his address.

He wants to increase state higher education spending — which currently sits at one of the lowest levels in the nation — while changing how the system operates.

This would entail spending $194 million in the new fiscal year to create a unified governance system to oversee both the commonwealth’s 10 state universities and 15 public community colleges (the details of which would be up to the state legislature).

Another $279 million would boost higher education assistance grants and reduce state school tuition.

Shapiro also proposes transferring an additional $283 million of existing state sales tax revenue to the commonwealth’s more than 50 public transit agencies next fiscal year. These systems warn that they’re facing a fiscal cliff.

The governor is asking the legislature to issue a $500 million bond for a grant program that would help businesses relocate to or expand within Pennsylvania — part of an existing economic development initiative.

Other highlights from Shapiro’s budget proposal include:

• $214 million to increase the state’s reimbursement to health aides who work with adults with intellectual or physical disabilities.
• $50 million for the popular Whole-Home Repair Program, a pandemic-era initiative that provides state aid for home repair projects, like leaky roofs.
• $100 million for gun violence prevention.
• $50 million to expand a reinsurance program within the state’s public insurance marketplace, which the administration predicts could lower premiums for up to 200,000 people.
• $30 million to the Fire Company and Emergency Medical Services Grant Program to recruit and retain workers.
• $4 million to create a state medical debt relief program that could buy up unpaid medical bills for pennies on the dollar.

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