The newly enacted $50.1-billion state budget for fiscal year (FY) 2025-2026 far exceeds actual revenues and puts Pennsylvania’s finances on a dangerous path toward future tax increases, according to the Pennsylvania Manufacturers’ Association (PMA).
“While the ink is barely dry, one thing is already clear: this spending plan leans hard on one-time cash and future revenue expectations that are unlikely,” PMA wrote in its Nov. 17 Legislative Bulletin, noting there are several positive provisions, mainly in permitting reform and exiting PA from the Regional Greenhouse Gas Initiative (RGGI) carbon tax.
Nevertheless, the total spending numbers in the FY 2025-2026 budget exceed Pennsylvania’s current revenue intake by about $5 billion, PMA said.
“While the General Fund balance, one-time transfers, and lapsed funds filled the hole this year, funds are quickly running dry in sustaining this level of spending in future years,” according to PMA. “The Commonwealth Foundation estimates that by FY26-27, the structural deficit Pennsylvania faces would represent a tax increase of approximately $1,500 per family of four.”
The association pointed out that the state stays on track with the long-promised Corporate Net Income Tax (CNIT) reduction, which moves from 7.99 percent to 7.49 percent in 2026 and ultimately to 4.99 percent by 2031.
Improvements to Net Operating Loss (NOL) provisions also were maintained, and the ability of Pennsylvania companies to offset new losses at the federal standard of 80 percent by 2029 remains intact, PMA said.
“However, these provisions did not help Pennsylvania companies offset past losses, especially those incurred during government-mandated shutdowns in 2020,” the group wrote, adding that while the CNI and NOL provisions move the commonwealth forward, other major tax changes push Pennsylvania backward, “particularly those that decouple the state from several federal pro-growth tax reforms manufacturers rely on.”
For example, instead of aligning with federal law to allow immediate expensing, Pennsylvania will force companies to add back federal deductions tied to research and development, meaning higher state taxable income for employers reinvesting in innovation, followed by a five-year amortization period, said PMA, which estimates the fiscal impact will be a $754.8-million hit to employers in FY 2025-2026.
Additionally, lawmakers included a requirement that the state Department of Revenue must, by Dec. 31, 2026, quantify the impact of these federal decouplings, and in its report must detail revenue effects, the number of taxpayers harmed, and how the CNIT rate cuts and NOL expansions compare to the additional tax burden created.
“If completed honestly, that report will likely confirm what employers already know: rejecting federal expensing rules creates friction, uncertainty, and unnecessary cost,” PMA wrote.
The bottom line, according to the group, is that the new budget expands spending far beyond Pennsylvania’s current revenue trajectory, relies heavily on one-time transfers to appear balanced, and increases taxes on employers by decoupling from proven, pro-growth federal reforms.
“While permitting reforms and RGGI withdrawal are clear wins, state government should be committed to sustainable budgeting and fiscal policies that attract long-term business investment,” PMA said.