By Joseph Johns

Pennsylvania has a $14 billion surplus and two competing visions of how to spend it.

Gov. Josh Shapiro (D) wants to increase government spending, with a proposed 2024 state budget that spends $3 billion more than the state takes in. Republicans in the legislature, on the other hand, want to cut taxes, returning some of that surplus to taxpayers and improving the state’s competitiveness.

Pennsylvania Senate Republicans—with the help of eight Democrats—recently passed SB 269 to reduce the state’s individual income tax and eliminate the locally assessed gross receipts tax (GRT) for electricity producers. (The companion bill, HB 2388, awaits a hearing in the Pennsylvania House Finance Committee.)

These reforms could result in significant savings for Pennsylvania residents.

SB 269 is projected to save Pennsylvania taxpayers approximately $1.27 billion in fiscal year 2025 alone. The average family of four could expect $400 more in their pocket in FY 2024-25 and $900 in FY 2025-26, according to the Commonwealth Foundation.

The tax reforms would also make Pennsylvania more competitive with its peers. This year, 16 states reduced their individual income tax rates, and 27 have done so since 2021.

The economic literature is clear. States with lower costs of living, lower marginal tax rates, and lower overall tax levies attract more residents than states with higher tax burdens. This makes intuitive sense as households across the state grapple with higher-than-normal inflation and the rising cost of raising a family. More to the point, lower tax rates are associated with increased investment, more job creation, and in-migration. As the U.S. economy becomes increasingly mobile, Pennsylvania must remain competitive to attract people and businesses.

To be clear, though the proposed tax cuts would benefit Pennsylvanians and the state’s economy, they wouldn’t pay for themselves. Economic growth can reduce the cost of the tax cuts, but not eliminate them. To be fiscally responsible, they must be paid for in some way, either out of projected revenue growth or by offsetting reductions.

For this reason, the tax cut bills should be seen as a preliminary negotiating position—a counteroffer to Gov. Shapiro’s budget proposal. With a large surplus and expectations of robust collections in future years, the governor wants a large spending increase. Legislative Republicans want a large tax cut. Like any fruitful negotiation, neither side is likely to get everything they want. But at minimum, this lays the groundwork for a valuable debate about priorities.

Reducing the individual tax burden and reforming the state’s energy tax are worthy goals. But if paired with the governor’s spending increases, they’d result in an unstable budget. As the two parties reconcile their differences, they should remember the tangible benefits pro-growth tax reform can produce for all Pennsylvanians.

Joseph Johns is a State Tax Policy Analyst at the Tax Foundation, a nonpartisan tax policy think tank in Washington D.C.