New ‘sin taxes’ bolster Shapiro’s spending plan

(The Center Square) – Gov. Josh Shapiro was successful last year increasing spending by billions of dollars, and he’s looking to spend even more this year.

Even before the administration released its newest budget proposal, recent forecasts by the state Independent Fiscal Office, or IFO, estimate Pennsylvania will have a nearly $3.4 billion deficit to address by the time the state’s current fiscal year comes to an end in June.

New revenue, if there are no efforts made to scale back spending, will be needed to address the looming shortfall.

Pennsylvania has several so-called “sin taxes” – on things like tobacco, alcohol and gambling – that generate revenue for the state. Shapiro, during his annual budget address on Tuesday before a joint session of the General Assembly, argued for adding new taxes on legalized and regulated “games of skill” machines and recreational marijuana.

“We’ve been putting this off for too long; it’s time to regulate and tax skill games and protect the interests of our commonwealth,” said Shapiro. “Like skill games, there’s another issue that’s long overdue to regulate and tax – and that is adult-use cannabis.”

The governor proposed similar efforts to legalize and tax both as part of his last budget proposal, but neither request garnered enough support in the General Assembly.

“District attorneys across the commonwealth are calling on us to regulate these machines and finally provide law enforcement with clear guidance,” Shapiro said of the “skill games” during his budget address. “On top of that, these machines have no quality control for the customers using them.”

Shapiro’s proposed 2budget anticipates $368.9 million from an “expanded Video Gaming Terminal (VGT) tax” which the governor’s administration will apply to “games of skill” that would be regulated by the Pennsylvania Gaming Control Board like other VGTs.

The budget estimates there are as many as 70,000 skill game terminals located throughout the state, including 12,000 terminals in locations where Pennsylvania Lottery products are sold. Shapiro suggested these terminals are primarily responsible for a $200 million drop in profits during the past five years for the Lottery Fund, which supports programs for older Pennsylvanians.

These new skill games would be capped at no more than five machines per establishment and a maximum of 30,000 statewide, with the statewide total to increase incrementally to 40,000 by 2030. Like existing VGTs, the games would be taxed at 52% of Gross Terminal Revenue, or GTR. Five percent will be transferred to the Lottery Fund, with the other 47% deposited into the state’s checking account.

Shapiro’s latest proposal incorporates a higher tax on skill game VGTs, something Pennsylvania’s existing casinos have wanted if the state goes the route of legalizing their use.

However, the skill game industry has pushed back against imposing a high tax rate and opposed giving the Gaming Control Board regulatory authority. The ongoing disagreements have been enough to scuttle prior attempts to find a compromise – and more state revenue – during the past few years.

As for marijuana, Shapiro noted 24 states have already legalized adult-use cannabis, including most of Pennsylvania’s neighbors, except West Virginia.

“I want to be real with you – as a father of four and as the former chief law enforcement officer of this commonwealth, this one was hard for me,” said Shapiro. “But I took the time to study it and understand the impacts – to understand the choice between continuing the black market of drug dealing versus a highly-regulated industry with protections in place for our children. Letting this business operate in the shadows doesn’t make sense.”

He added that Pennsylvanians who want to buy marijuana can just drive into one of the neighboring states in which it is legal.

“By doing nothing, we’re making Pennsylvania less competitive,” Shapiro said, later adding, “We’re losing out on revenue that’s going to other states instead of helping us here.”

Because Shapiro’s proposed budget assumes regulated sales within Pennsylvania won’t begin until Jan. 1, 2026, the primary source of revenue from legalized adult-use marijuana would initially be from license fees paid by those participating in the production and sale of the products. The governor’s office anticipates those fees will yield $509.5 million.

The proposed 20% tax on the wholesale price of marijuana products is expected to produce $15.6 million during the 2025-26 fiscal year, with another $11.4 million coming in sales taxes derived from retail sales of marijuana.

As the system ramps up, the wholesale tax is expected to rise to $63 million in 2026, $130.3 million in 2027 and $185.5 million in 2028. The IFO, when adult-use marijuana legalization was proposed last year, estimated an additional $113 million increase of sales tax revenue the first full fiscal year of legalized retail sales, with the additional sales tax revenue changing little in future years.

Legalizing adult-use marijuana has been a difficult lift in the General Assembly. Though the Democrat-controlled House of Representatives has been supportive of the idea, the Republican-controlled Senate has remained opposed to the proposal.