HARRISBURG, Pa. -- Gov. Ed Rendell outlined a $29 billion budget Wednesday that would expand spending on education, prisons and health coverage while drawing from federal aid and state surpluses, increasing some taxes and cutting other programs.

Pa. Budget: Video Poker, More Local Sales Tax, School Mergers

The plan -- a 2.5 percent increase from what was originally approved for the 2008-09 budget -- also would withdraw hundreds of millions of dollars from the state's "rainy day" contingency fund without draining it completely.

"The budget I propose requires considerable sacrifice and pain, so that we can close the deficit and put our fiscal house in order, while at the same time continuing the kinds of strategic investments that strengthen Pennsylvania's economy for the long-term," Rendell said.

Many key proposals have trickled out in recent days, from adding a dime per pack to the cigarette tax to legalizing video poker machines and using the money generated to help thousands of college students pay tuition.

Rendell wants to legalize the nearly 20,000 gaming machines in bars and restaurants across the state, in order to collect the taxes on the profits.

But Rep. John Maher said residents shouldn't get too excited about that plan.

"He forgot to mention that Pennsylvania would have to refund $600 million to casino license fees." Maher said.

But there are many other points of interest in the proposal, too.

The state's basic education subsidy to schools would increase $300 million for the fiscal year that starts July 1 -- but in a proposal sure to ignite debate, Rendell said he wants to eliminate 400 of the state's 500 public school districts.

"In Maryland, for example, they have just 24 districts, all at the county level, and Maryland enjoys student achievement levels that are among the highest in the nation," Rendell said.

Rendell didn't propose specifics for Pennsylvania, saying that a commission should be formed to study the best way to consolidate school districts.

"We just don't need that many school districts, and more importantly, in today's economy we cannot afford them," Rendell said. "Let's be clear: We all agree that small schools are important, but reducing the number of districts doesn't automatically mean bigger schools. Fewer districts does mean that we can spread the local share of public education costs across a wider population, and that means reducing the pressure on local property taxes."

Each county will have the chance to raise the sales tax by one percent. Rendell still promises no hikes in income or property taxes.

"Oh, but he is increasing property taxes," said Maher. "By reducing the state support for public education in our school districts across the state, the local school districts are going to have to turn to local residents in the form of property taxes to make up that difference. So what he's doing is passing the buck by cutting funds that would otherwise be going to school districts."

In Allegheny County, Chief Executive Dan Onorato has said that merging municipalities along school district lines would make services more efficient. He points to the Woodland Hills School District -- which serves a dozen municipalities and boroughs -- as a prime example.

The Pennsylvania Governor's Schools of Excellence would be a victim of Rendell's budget cuts.

"In some cases, we're cutting terrific programs that we can perhaps restore when the economy recovers but we just can't afford them today," Rendell said. "One such example is one of my very favorite programs -- the Governor's Schools of Excellence, a terrific weeklong series of academic enrichment forums offered by the Department of Education to students from all over Pennsylvania. We simply can't afford to fund it this summer."

Funding would be cut for anti-drug education, health literacy, upgrades to child-care centers and a summer program for artistically and academically talented high school students.

"We simply have no choice. The crisis demands that we make these cuts," Rendell said.

The budget includes new taxes on the extraction of natural gas, following the model set by states like Alaska and Texas.

"The minerals under our soil should be taxed when extracted," Rendell said. "We have a Pennsylvania gold rush going on in the form of drilling for natural gas on what is known as the Marcellus shale. Scientists estimate, if we can extract 10 percent of the natural gas that exists underground in the Marcellus, it will be enough to supply the natural gas of the entire United States for two years."

More On Marcellus Shale:
Team 4 Investigation (Dec. 19) | Team 4 Investigation (Nov. 17)

Coupled with the dime-a-pack increase on cigarettes, new tobacco levies proposed by Rendell are expected to bring in $100 million a year.

"I once again propose a tax on smokeless tobacco," Rendell said. "Pennsylvania is the only state in the nation that does not tax chewing tobacco, snuff or cigars."

"There are a lot of people that do depend on tobacco and the tobacco tax. The state's going to feel an effect as consumption drops because the tax will drop," said Scott Frankel of Triangle Candy and Tobacco.

The budget would more than double the number of lower-income residents in the state's adultBasic health coverage program to about 90,000. The state also would add 2,400 beds in prisons and community corrections facilities.

Rendell also revived a proposal to have the Department of Public Welfare buy pharmaceuticals directly from drug companies, eventually saving $146 million annually.

He proposed letting individual counties add a local fee onto the state sales tax and splitting the money with cities in need.

"I believe we should do more to help cities and counties address the budget challenges they also face," Rendell said, "and that's why I'm proposing to give counties the ability to broaden their tax base by allowing them to impose a sales tax increase of up to 1 percent on top of the state sales tax and share 50 percent of those proceeds with our hard-pressed cities."

To raise additional money, he told legislators he would consider closing tax loopholes for companies based outside the state, or charging municipalities that rely solely on the state police for police services -- a proposal which drew applause from other lawmakers in the room.

"In the last year alone, 18 more municipalities have shifted their tax burden for policing to the state," Rendell said.

Locally, one of the largest areas that would be affected is Hempfield, a Westmoreland County township that doesn't have its own police force.

More:
Hempfield Debates Forming Police Dept. (Jan. 14)
Some Municipalities Could Be Forced To Pay For State Police (Sept. 4)

Amid all the cuts, Rendell proposed the creation of a new Cabinet-level agency -- the Department of Emergency Management and Homeland Security.

The governor also asked the Legislature to kick in $175 million from its own reserves to help with the current year's shortfall.

He said his budget would save $977 million by eliminating 101 line items and reducing another 346, but in previous years many such cuts were eventually restored by the Legislature during budget negotiations.

"We are just managing to be more effective and do more with less every year," Budget Secretary Mary Soderberg said.

Rendell proposes doubling to $130 million the capital funding for the 14 universities in the State System of Higher Education. He also wants $537 million to fix bridges, upgrade rail and aviation infrastructure and improve water and sewer systems, flood control and hazardous dams.

In recent weeks, Rendell and his aides have talked about a need for state government layoffs, and his budget would reduce the number of state jobs by about 2,600.

Rendell spokesman Chuck Ardo said officials have not decided how many of those job cuts would be made through attrition and how many would be the result of layoffs.