The Hedgehog (Hh) pathway is essential for organ development, homeostasis, and regeneration. Dysfunction of this cascade drives several cancers. To control expression of pathway target genes, the G protein-coupled receptor (GPCR) Smoothened (SMO) activates glioma-associated (GLI) transcription factors via an unknown mechanism. Here we show that, rather than conforming to traditional GPCR signaling paradigms, SMO activates GLI by binding and sequestering protein kinase A (PKA) catalytic subunits at the membrane. This sequestration, triggered by GPCR kinase (GRK)-mediated phosphorylation of SMO intracellular domains, prevents PKA from phosphorylating soluble substrates, releasing GLI from PKA-mediated inhibition. Our work provides a mechanism directly linking Hh signal transduction at the membrane to GLI transcription in the nucleus. This process is more fundamentally similar between species than prevailing hypotheses suggest. The mechanism described here may apply broadly to other GPCR- and PKA-containing cascades in diverse areas of biology.