Economic woes hit U.S. state budgets

There is no sign of the economic woes hitting the war on terror or the war in Iraq and Afghanistan. Where the defence budget is concerned there are never cutbacks or cries about entitlements.

Economic woes hit state budgets

Peter Grier | Staff writer
The Christian Science Monitor
April 2, 2008

Soaring inflation and shrinking tax revenues will make it tougher for
at
least 25 states to fund public services.

Washington - In Nevada, Gov. Jim Gibbons told legislators on March 31
that
the state's budget shortfall could reach $900 million by the middle of
next
year - and that he wants spending cuts beyond the 4.5 percent cutbacks
he
ordered in January.

In Florida, state leaders say they are facing a series of budget
shortfalls
unprecedented in modern history. They're considering using up as much
as
$1.7 billion in revenue reserves to plug spending gaps in coming
months.

In Maryland, the General Assembly last fall raised taxes by $1.4
billion a
year at Governor Martin O'Malley's urging. His job approval rating has
now
fallen below 40 percent.

Across the United States, soaring inflation and shrinking tax revenues
have
combined to place state budgets under severe stress.

This fiscal year is tight, and the next one promises to be even
tighter. At
least 25 states will be in the red for fiscal 2009, which begins this
coming
July for many. The combined shortfall is expected to total at least $39
billion, according to figures compiled by the Center on Budget and
Policy
Priorities.

"The result may be a squeeze on states' ability to fund services," said
Robert Ward, deputy director of the State University of New York's
Rockefeller Institute of Government in a report on state budgets
released
March 31.

The causes of state budget problems are easy to spot with even a
cursory
glance at the business section of a newspaper.

Falling home prices are causing consumers to curb spending, which in
turn
reduces state sales tax revenues. Unemployment is rising, and income is
flat
or declining - resulting in state income tax revenues that are not as
high
as once projected.

With the effects of inflation and enacted tax changes added to this
mix,
combined state tax revenues decreased by 4.3 percent in the fourth
quarter
of fiscal 2007, according to figures compiled by the Rockefeller
Institute.

Meanwhile, the cost of the items states spend their money on is rising
at a
rate greater than that of overall national inflation. State and local
government inflation rose 6.2 percent for fiscal 2007, with jumps in
fuel
and healthcare and pension costs big contributors.

"States are experiencing a classic nutcracker effect: costs are rising
sharply just as revenues falter," said Mr. Ward.

Among the states where revenues dropped significantly were Oregon,
Florida,
West Virginia, Mississippi, Arizona, and Nevada, according to the
Rockefeller survey.

Kentucky, Oklahoma, Tennessee, North Carolina, Wyoming, Delaware, and
Wisconsin showed smaller declines.

Meanwhile, some mineral and petroleum-rich states showed revenue
increases.
These included Alaska, Colorado, and Texas.

Given the unpredictable nature of the course of the national economy
and the
course of action Washington may pursue in attempting to jump-start it,
predicting the status of future state budgets is fraught with
uncertainty,
notes the Rockefeller Institute report.

"One apparently safe prediction: [It will be] a very difficult year for
state budget makers," it concludes.

Of course, those budget makers may be used to trouble by now. Though a
booming economy eased some of their problems in recent years, overall,
many
states have never recovered from the fiscal crisis of the early part of
the
decade.

The recession of 2001 was a difficult one in many state capitals. State
expenditures fell sharply - and for all states combined, today they
remain
below the level of 2001, when inflation is taken into account,
according to
a report by the Center on Budget and Policy Priorities (CBPP).

And budget problems can be more severe for states than the federal
government. By law many cannot run a deficit as Washington can.

Among the budget cuts that have been made or proposed, according to a
roundup compiled by CBPP, are reductions in public health programs. In
California, for instance, Gov. Arnold Schwarzenegger has proposed
making
some families pay more for the State Children's Health Insurance
Program.

At least eight states are proposing to cut K-12 education, according to
the
CBPP roundup. Arizona may eliminate childcare subsidies for some
low-income
working families.

Meanwhile, eight states - including Florida, Kentucky, and Virginia -
either
have already reduced or may soon reduce funds for public higher
education.

Tax hikes are another means of dealing with red ink. But as the
experience
of Governor O'Malley shows, they can be very unpopular.

The $1.37 billion in tax increases approved by Maryland's General
Assembly
last year is already facing a significant alteration: Fierce industry
reaction to a surcharge on computer services has led to the
consideration of
a proposed tax on millionaires to replace the computer levy.

Michigan also passed a broad tax increase in late 2007. Other states
considering revenue enhancements include Kentucky, where the governor
has
proposed raising the tobacco tax.

.Material from the Associated Press was used in this report.

http://www.csmonitor.com/2008/0402/p03s05-usec.html