By Carl Marrara

Pennsylvania’s 2024–25 budget, totaling $47.6 billion, ignores that wisdom entirely. The hole is getting deeper. Anticipated revenues for the fiscal year are expected to fall short by $3.6 billion. According to the Independent Fiscal Office, future revenues are projected to grow by only 2.1% year over year. That means total expected revenue for 2025–26 will be about $44.9 billion—yet Governor Shapiro has proposed spending $51.5 billion. That leaves the Commonwealth staring down a potential structural deficit of $6.81 billion.

Yes, Pennsylvania currently has $11 billion in reserves—but at this rate, those funds will be exhausted within the next three years. Running annual deficits approaching $7 billion is a recipe for fiscal disaster. And once the reserves are gone, the state will have only two viable options to meet the constitutional obligation of having a balanced budget: impose massive spending cuts or enact steep tax increases.

There is, however, a third option – economic growth.

But economic growth doesn’t occur in an environment marked by fiscal instability and the looming threat of tax hikes. Unfortunately, that’s the trajectory Pennsylvania is currently on. CEOs and site selectors for global companies evaluate the long-term stability of potential investment locations. It’s not just the tax rate that matters – it’s the predictability of that rate, and the broader fiscal health of the state.

There’s a critical distinction between tax rates and tax revenue. In 2013, North Carolina had a corporate income tax rate of 6.9%. The state began reducing that rate, bringing it down to 2.5% by 2019. It didn’t stop there. North Carolina also lowered its personal income tax rate from 4.99% in 2022 to 3.99% today. Lawmakers there are now on track to phase out the corporate net income tax entirely by 2030. The result? Rather than facing deficits, North Carolina is currently enjoying a $1 billion budget surplus while holding nearly $4 billion in reserves.

This financial success is fueled by population and business growth – the two go hand-in-hand. It’s clear evidence that people and companies vote with their feet, based on their wallets. Since the 2020 census, North Carolina has added approximately 605,000 residents, making it one of the fastest-growing states in the country, trailing only Florida and Texas. What is the personal income tax rate in Florida and Texas? There isn’t one.

Governor Shapiro appears to be pursuing a strategy of spending our way into prosperity, yet the data from high-growth states suggest the opposite approach is what works. Pennsylvania lawmakers should prioritize reining in spending, preserving recent business tax reductions, and removing bureaucratic barriers to investment. It simply should not take longer to permit a project in Pennsylvania than it does to permit and complete construction in other states, but that is exactly what’s happening.

Now that the budget deadline has passed, all eyes are on Harrisburg to see which path the Commonwealth will take. Make no mistake, the stakes are high. Pennsylvania is in a national competition for future business investment and resolving the structural deficit once and for all depends on getting this right.

Carl Marrara is Executive Director of the Pennsylvania Manufacturers’ Association.

Nothing contained here should be considered as an attempt to aid or hinder the passage of any legislation.

The views expressed here are those of the author and not necessarily those of the Susquehanna Valley Center.