By the Pennsylvania Manufacturers’ Association 

 

Reality Isn’t Optional

Surrealist science fiction author Philip K. Dick once wrote, “Reality is that which, when you stop believing in it, doesn’t go away.” Governor Josh Shapiro may not believe in Pennsylvania’s fiscal reality of structural deficits, unfavorable demographics, a depleted surplus, and limited revenue, but that reality is not going away.

In rolling out his spending plan for Fiscal Year 2026-27, Governor Shapiro plunked down a stupefying $53 billion outlay after the previous year’s revenue collections were only $46 billion. FY 25-26 only met its $50 billion expenditure by using up the entire state budget surplus. Pennsylvania’s emergency reserve “Rainy Day Fund” retains roughly $8 billion, which it seems Governor Shapiro intends to deplete before he faces the voters in November.

Spending Restraint Matters

“Spending down the Rainy Day Fund to juice the economy for his re-election effort is a deeply selfish and cynical act by Governor Shapiro. When Governor Casey did the same thing in 1990, it led to a post-election budget shortfall, massive tax increases on employers, and a severely damaged competitive position, leading to two generations of economic underperformance and anemic population growth. Pennsylvania’s current fiscal situation calls for spending restraint, doing more with dollars already being spent, and a systematic review to eliminate fraud, duplication, and any other excesses that can be found.”

— David N. Taylor, President & CEO of the Pennsylvania Manufacturers’ Association

But spending restraint matters – it’s the foundation upon which sound fiscal policy is built. When expenditures don’t match revenues, the only option left for lawmakers is to raise taxes.

Political Sound Bites vs. Reality

“Pennsylvania is open for business.” It is a phrase Governor Shapiro has repeated at press conferences, budget proposals, and campaign events. But businesses do not make decisions based on slogans. Private sector investment is voluntary and responds to legislative proposals, regulatory environments, and long-term policy signals. When those signals point in the wrong direction, jobs and investment follow the path of least resistance, often across state lines.

A Cautionary Tale from Maryland

A recent and powerful example comes from Maryland, where rhetoric about economic growth collided directly with policy reality. Delegate Brian M. Crosby, a Democrat representing St. Mary’s County, is also a small business owner. He serves as the vice chair of the Maryland House Economic Matters Committee, which handles much of the state’s business and economic legislation. He is also the owner of a small IT company that works as a subcontractor on Department of War contracts.

Until last year, Del. Crosby’s company was based in his home state of Maryland. That changed on the same day that Maryland Governor Wes Moore and legislative leaders announced a budget agreement that included a new three percent tax on IT and data services.

Del. Crosby had warned his colleagues repeatedly about the consequences of such a tax. The idea that the tax would simply skim “50 cents on the dollar,” he said, was a fantasy. For businesses like his, especially small subcontractors working on fixed federal contracts, the tax would not be passed along. It would be absorbed, at a loss.

“You’re not taking 50 cents on one dollar. You’re taking one dollar and fifty cents from one dollar.”

— Delegate Brian M. Crosby

Had his business remained in Maryland, Del. Crosby said bankruptcy would have followed within a year. Instead, he acted quickly, registering his company out of state, establishing a new office in Virginia Beach, and shifting operations away from Maryland while maintaining only a minimal presence. The work will still be done and contracts will still be fulfilled. But the growth, jobs, and tax base will now benefit Virginia – unless recent policy changes under newly elected Governor Spanberger force yet another tough business decision.

The irony is impossible to ignore. Maryland’s leaders repeatedly claim they want to grow their technology and cybersecurity sectors and attract high-paying defense-related jobs. At the same time, they enacted a tax that directly targets the backbone of that very industry. The mere threat of these kinds of taxes forces business investment to locations with more competitive business policy practices.

Pennsylvania’s Policy Contradictions

Pennsylvania’s policymakers should view Maryland’s example as a warning.

But here in our Commonwealth, many of the same policy contradictions are emerging. While Pennsylvania lawmakers often say they want to attract investment, innovation, and family-sustaining jobs, recent proposals and legislative priorities point in the opposite direction. Businesses see these proposals not as isolated ideas, but as part of a broader trend toward higher costs, greater complexity, and diminished competitiveness.

Energy Policy Concerns

Energy policy is one of the clearest examples. Manufacturers and data-intensive industries rely on affordable, reliable energy to operate and grow. Yet proposals that would increase energy costs through new taxes, fees, or regulatory mandates send a troubling signal to employers evaluating long-term investments in Pennsylvania. Energy costs directly affect operating margins, expansion decisions, and whether Pennsylvania remains competitive with neighboring states that actively market lower-cost, business-friendly energy environments.

Research & Developement Treatment

Governor Shapiro referenced the need to embrace the innovation of the private sector and attract and retain start-up businesses. And at the federal level, businesses are encouraged to invest in research and development through favorable tax treatment that allows for immediate expensing of research costs. But in this past budget, Pennsylvania has chosen not to fully align with this approach, instead requiring adjustments and amortization that diminish the value of research investment within the Commonwealth. While Pennsylvania does offer a research and development tax credit, the cap remains limited and demand far exceeds availability as lawmakers continue to consider tax code changes that decouple Pennsylvania from federal provisions in ways that increase administrative burden and uncertainty for employers.

Bad Ideas That Won’t Go Away: Combined Reporting

Another recurring proposal in Harrisburg is mandatory unitary combined reporting (MUCR) for corporate taxes. Yet again, Governor Shapiro has included this unwise policy in his FY2026-27 budget proposal. MUCR would require multi-state businesses to combine the income of related entities into a single tax return for Pennsylvania purposes. Proponents frame it as closing loopholes, but in practice it dramatically increases compliance burdens, reduces predictability, and makes Pennsylvania a less attractive place for companies that operate across state lines. Given Pennsylvania’s strong “add-back” provisions, the Pennsylvania Department of Revenue already possess the power to ensure businesses aren’t moving revenue to shelter state tax obligations. But reintroducing this bad idea, year after year, signals to employers that Pennsylvania may be moving toward a more punitive and complex tax structure.

Competitiveness Is A Prerequisite for Growth

The cumulative effect of these proposals matters. Businesses do not look at one policy in isolation. They assess the overall climate: rising energy costs, complex reporting requirements, unfriendly treatment of innovation, and persistent fiscal uncertainty all factor into decisions about where to locate facilities, expand operations, and hire workers.

Maryland’s experience shows how quickly these decisions can materialize. Delegate Crosby was not a political opponent of his state’s leadership. He was part of it. And yet, when faced with legislation that made continued operation untenable, he did what any responsible business owner would do. He left.

Tax competitiveness is not a talking point; it’s a prerequisite for growth. Pennsylvania risks realizing Maryland’s mistake if wishful rhetoric continues to outpace economic realities.

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 neccessarily those of the Susquehanna Valley Center for Public Policy.