Lawmakers returned to the Capitol Monday to begin the June session, leading up to the end of the month deadline to pass a state budget.

The state’s financial condition has improved slightly since Gov. Josh Shapiro released his $53.2 billion budget but not enough to overcome concerns of Republican lawmakers who say Shapiro’s plan spends far more than it brings in and would force the state to raid its savings.

Shapiro’s proposal would increase state spending 5.4% over last year and would drain more than half the $7.8 billion sitting in the state’s Rainy Day Fund. The 2025-26 budget was balanced by using more than $1 billion in funds that had been appropriated in prior budgets but never spent.

Shapiro proposed creating a Federal Response Fund by transferring $100 million from the Rainy Day Fund. The response fund is designed to give the administration broad authority and flexibility to respond to federal aid and reimbursement cuts under the Trump administration in such areas as disaster aid and low-income food assistance.

Another major new proposal in Shapiro’s budget would borrow $1 billion through a bond offering to pay for improvements to strengthen the energy grid, tackle housing shortages and upgrade local government facilities through the Pennsylvania Program for Critical Infrastructure Investment.

Senate Republicans immediately objected that the borrowing would serve to allow Shapiro’s administration to spend tax dollars and leave taxpayers picking up the bill for years to come.

“We will be left holding the bag,” Senate President Pro Tem Kim Ward, R-Westmoreland, told reporters. “The people of Pennsylvania will be left holding the bag.”

The state House in April passed House Bill 2400 that would enact the budget proposal unveiled by Shapiro in February. That legislation, however, did not include programs or priorities sought by House Democrats in addition to those sought by the governor.

The House Finance Committee, however, has scheduled a meeting for Wednesday to consider House Bill 1678, which would create a digital tax ranging from 2.5.%-10% of the gross annual revenue of the company. The tax rate would be tied to the size of the company.

The digital tax is modeled on legislation approved in Maryland but now tied up by legal challenges led by the U.S. Chamber of Commerce and tech industry groups.

Changing conditions

While Shapiro’s budget was just released four months ago, the political landscape has changed dramatically since then. Rising gas prices due to the war in Iran has amplified affordability concerns for voters. And the near constant drumbeat of news coverage over community pushback against data centers has forced elected officials to re-examine how to regulate the fast-emerging industry.

Shapiro rolled out proposed standards that data center operators must follow to qualify for a state tax credit and to gain access to assistance from his administration to expedite permitting and regulatory approvals. He updated that proposal this week, specifying that data centers must not only provide their own power, they must get a portion of their electricity from renewable energy sources. Shapiro’s data center standards also mandate that data centers must hire at least 50 permanent workers to get the tax credit.

However, with community groups around the state organizing to oppose data centers, Treasurer Stacy Garrity, the Republican nominee for governor, called for a moratorium on new data center approvals. A pair of Republican lawmakers introduced legislation May 27 that would authorize local governments to ban data centers. In addition, state Sen. Jarrett Coleman, R-Lehigh, and state Rep. Jamie Walsh, R-Luzerne, also introduced a bill that would eliminate the data center tax break and direct the state to funnel the money that would have gone for the data center tax credit to reduce the state’s gas tax.

The state is projected to lose $188 million in revenue in 2026-27 due to the data center tax break. But with the number of data centers in the state poised to grow exponentially, state officials have forecasted that the tax credit could cost the state in excess of $500 million by 2030-31.