Gov. Josh Shapiro pitched a $53.3 billion state budget for the 2026-27 fiscal year that will in many ways serve as a policy platform for Democrats on the 2026 midterm election ballot — including Shapiro himself, who is running for reelection, and Democratic legislators looking to command majorities in both chambers of the General Assembly.
The big ticket item is education. Shapiro, first elected in 2022, is seeking an additional $50 million for basic education funding, $50 million for special education funding and $565 million for schools the Legislature has identified as underfunded.
“Supporting our kids means investing more dollars in our schools and also ensuring they have a healthy, productive learning environment,” Shapiro told lawmakers gathered in the House chamber Tuesday.
He also urged legislators to ban students from using cell phones during the school day — a reversal aligning himself with the state’s teachers union, which flipped from advocating against a statewide ban last year. Such a proposal has found rare bipartisan consensus in the Capitol, and was passed by the Senate following Shapiro’s address.
“Students need to spend less time focused on their phones and more time focused on learning, on talking to their friends face to face, and on developing the critical skills they’ll need later in life,” Shapiro said.
Shapiro also pitched a $100 million tax credit program to incentivize venture capital projects in the agriculture, energy, life sciences, manufacturing and technology industries. And he wants to send $300 million to public transportation agencies, which was a hot-button issue sparking disagreements that stalled budget talks last year.
In response to drastic changes made by Congress and President Donald Trump’s administration to programs like Medicaid and the Supplemental Nutrition Assistance Program, Shapiro wants to set aside $100 million in state funds to aid Pennsylvanians affected by the changes.
“They’re breaking that compact they have with the people of Pennsylvania,” Shapiro said about the federal government, noting he’s successfully sued the Trump administration 19 times in the last year.
Shapiro is widely viewed as a White House contender in 2028. First, he faces reelection this year, challenged by state Treasurer Stacy Garrity, who boasts support from Trump and was endorsed by the state Republican Party last August.
Some state government observers predicted election-year politics could push negotiators to reach a consensus sooner than they have in recent years. The often-missed-deadline is June 30, the end of the state’s fiscal year.
Negotiations last year blew past that deadline and ran until November in one of the longest state budget impasses in recent history. Many of the issues that led to the standoff are again on the table this year.
Shapiro addressed last year’s delay in his speech, noting that Republican and Democratic leaders from both chambers agreed to meet in his office on Wednesday to begin negotiations earlier than they have in recent years. Last year, similar meetings were on pause from July to the end of October.
“We learned that we all need to be at the table, and that we all need to be at the table sooner,” Shapiro said. “When we all sat together, majority and minority, we made progress.”
Paying for it all Senate Republicans pounced on Shapiro’s total spending number, saying Pennsylvania simply can’t afford it.
“This is our fourth budget from the governor that spends way too much – a lot more than what we are bringing in in revenue,” Senate President Pro Tempore Kim Ward, R-Westmoreland, told reporters in a news conference after Shapiro’s address.
There is a disparity between Shapiro’s proposed budget amount and how much revenue Pennsylvania receives — the Independent Fiscal Office predicts the state will generate just under $49 billion in revenue.
To make up much of the difference, Shapiro is asking the Legislature to pull $4.6 billion from the state’s $7.8 Rainy Day Fund, which is intended for public emergencies, leaving a balance of about $3.3 billion. That proposal faces headwinds in the Republican-led state Senate.
“The moment we start draining that fund completely is the moment we’re gonna get bond downgrades, we’re gonna get a negative outlook, we’re paying more for our debt,” Appropriations Chair Scott Martin, R-Lancaster, said.” And all of a sudden, we have nothing.”
Shapiro also pitched revenue-generating ideas that have long circulated in the Capitol. Those include the regulation and taxation of recreational cannabis and games of skill, which he said are putting “communities at risk” without state intervention.
Shapiro would tax recreational cannabis sales at 20%, which his office estimated would secure about $200 million in revenue annually. The governor also proposed a separate $10 million for “restorative justice initiatives” related to past marijuana convictions and $25 million for small and diverse businesses.
But any recreational marijuana pitch faces at least one big hurdle. Last year, Martin told reporters he would “never run that” when asked about such a proposal. Any budget-related legislation needs to clear his committee before it can face a vote from the full chamber.
Taxing skill games has been an ongoing point of contention in the Capitol. Shapiro, as he pitched last year, wants lawmakers to tax the terminals — often placed in convenience stores, taverns, smoke shops and beer distributors — at 52%. His office estimates the commonwealth could see about $2 billion in revenue for the General Fund from such a tax on the 40,000 machines it would allow statewide.
As in past years, Shapiro is asking for a minimum wage hike to $15 an hour. He said that increase would reduce the state’s Medicaid expenses by $300 million because more than 60,000 people would surpass the minimum threshold to qualify for the health program.
“If you aren’t going to do this because it’s the right thing to do, or because it would let more families put food on the table for their kids, then do it because it’s going to save us $300 million and shrink our entitlement budget by growing our workforce and putting more money back in our workers’ pockets,” Shapiro said, eliciting a “Raise the wage” chant from Democratic lawmakers.
Reducing Medicaid utilization is a key priority of Senate Republicans this year, according to Majority Leader Joe Pittman, R-Indiana. The program cost the state about $14.5 billion in the previous fiscal year, with the federal government paying about $35 billion.
On raising the minimum wage, Pittman said he and his caucus are “willing to have a conversation.”
Improving education House and Senate Democrats applauded Shapiro’s entire budget proposal this year, especially noting the dollars allocated for public schools.
House Appropriations Chair Jordan Harris, R-Philadelphia, said he recently visited William Penn School District, where administrators told him about the impact the state funding has had on their students.
In 2023, the Commonwealth Court ruled that Pennsylvania unconstitutionally underfunds some of its 500 school districts. The General Assembly then adopted an adequacy funding formula to gradually channel extra dollars to those schools, in a plan that Democrats said would rectify the gap in about a decade from its enactment.
“This will be the third significant investment in righting that wrong ship,” Harris said.
The Education Law Center and The Public Interest Law Center, both plaintiffs in the Commonwealth Court case, said in a joint statement that though Shapiro’s budget would meet the next step in funding, the years it would take to rectify the gap is too slow.
“Those children who have constantly (borne) the weight of this neglect — low-income children, children of color, and children with disabilities — will continue to absorb the consequences of that failure until this job is completed,” the organizations said.
Pittman has said he wants to reevaluate the adequacy funding formula, as Republicans have argued that it sends extra money to school districts with declining enrollment rates.
Shapiro’s budget proposal maintains last year’s $111 million for school safety and mental health initiatives and $125 million for improving school buildings, as well as further restrictions on cyber charter school reforms that his office estimates will save districts statewide about $75 million annually.
The Educational Improvement Tax Credit program received an additional $50 million in last year’s budget to fund private school scholarships, but Shapiro made no mention of school choice initiatives in his address this year.
Affordability, housing, energy costsShapiro’s plan also aims to support new businesses in Pennsylvania. Most notable is his idea to change the Local Resource Manufacturing Tax Credit Program to the Reliable Energy Investment Tax Credit — it would allow certain energy-producing facilities to qualify for a maximum of $100 million in tax credits per year for three years.
Not all of Shapiro’s plans have an immediate cost to the state. He’s proposing some sweeping housing policies to help renters, including a statewide cap on rental application fees, codifying individuals’ rights to end a lease due to domestic violence and sealing eviction records for people who were never actually evicted.
Shapiro is pitching a sale of state-backed bonds to fund $1 billion in infrastructure projects related to energy generation, restoring old and constructing new housing projects, and improving school and municipal facilities.
That proposal caught the ire of Martin, who argued Shapiro was “sugar potting” by touting Pennsylvania’s bond rating in his speech while actively urging the Legislature to tap into the Rainy Day Fund, which Martin credited for boosting the score.
Missing from Shapiro’s speech was a call for funding a grant program to help homeowners pay for repairs, as many Democrats focused on housing policy have sought.
Shapiro also echoed his call from last year for the Legislature to adopt his “Lightning Plan,” which would include a host of policies from placing a cap on carbon emissions to creating a board designed to hasten energy-related project construction.
Last month, Shapiro convened a meeting of the state’s four largest electric utility companies: PECO, Duquesne Light, First Energy and PPL. That meeting, Shapiro told lawmakers, led to their agreeing to changes that would provide more transparency and reduce rates for customers.
AI and data center regulationsShapiro also called on lawmakers to pass restrictions on AI that he said would protect children, like requiring age verification and parental consent to access the software, flagging when users discuss self-harm or violence, reminding users that no other person is responding to their requests, and prohibiting chatbots from generating sexually explicit content of minors.
“Today, new technologies are allowing students to be creative, build worlds, and explore their own power to innovate and problem solve,” Shapiro said. “We want to encourage them to do that, but we’ve got to ensure they’re safe and protected.”
Democratic lawmakers have increasingly called for statewide regulation of data center development in the face of widespread public backlash against the facilities, which are often used to house artificial intelligence infrastructure. Shapiro has been an adamant supporter of data center developers setting up their facilities in Pennsylvania.
But on Tuesday, he announced a new framework for unspecific policies that administration officials said the governor wants to see lawmakers consider in collaboration with local officials. They include requiring developers to “bring their own power generation,” increased transparency standards, hiring and training local workers and some environmental protection standards, like water conservation.
“If companies adhere to these principles, they will unlock benefits from the Commonwealth, including speed and certainty in permitting and available tax credits,” Shapiro said.
Pittman seemed open to such discussions.
“The notion that data centers should bring their own supply to the market seems to make a lot of sense,” Pittman said.
NOTE: This story was last updated at 5:45 p.m. on February 3, 2026.