The Hedgehog (Hh) cascade is central to development, tissue homeostasis and cancer. A pivotal step in Hh signal transduction is the activation of glioma-associated (GLI) transcription factors by the atypical G protein-coupled receptor (GPCR) SMOOTHENED (SMO). How SMO activates GLI remains unclear. Here we show that SMO uses a decoy substrate sequence to physically block the active site of the cAMP-dependent protein kinase (PKA) catalytic subunit (PKA-C) and extinguish its enzymatic activity. As a result, GLI is released from phosphorylation-induced inhibition. Using a combination of in vitro, cellular and organismal models, we demonstrate that interfering with SMO-PKA pseudosubstrate interactions prevents Hh signal transduction. The mechanism uncovered echoes one used by the Wnt cascade, revealing an unexpected similarity in how these two essential developmental and cancer pathways signal intracellularly. More broadly, our findings define a mode of GPCR-PKA communication that may be harnessed by a range of membrane receptors and kinases.