States' coffers are feeling a pinch

Florida is working in special legislative session to cut property taxes as a way to stimulate consumer spending.

Nevada has called for a 5 percent cut in the budgets of all state agencies.

Michigan has expanded its sales tax to cover luxury services such as massages, manicures, and skiing, which were not taxed previously, and has increased the income-tax rate from 3.9 percent to 4.35 percent.

With at least a quarter of US states collecting less money than anticipated from sales taxes, and many others barely holding even with inflation in their overall revenues, state budgets appear to be headed for tough times, say several economists. Closing the gap may require states to use creative measures, these same economists predict. With a falling housing market, several experts see troubling economic warnings similar to those that preceded the US recession in 2001.

This time, they say, states would probably be on shakier ground because they won't have the years of fat that the 1990s stock-market boom provided.

"Many of the indicators, from sales-tax receipts to national debt to purchase of US treasury bonds, are similar to the year 2000," says Philippa Dunne, a co-editor of The Liscio Report on the economy. "But this time, states may have to take more drastic measures because they won't be coming out of a decade in which they had tons of money."

Why housing market downturn is key sign

The receding housing boom is affecting nearly every state and is a key indicator, say Ms. Dunne and others, because it produces a domino effect, colliding with the consumer purchases that feed state treasuries via sales taxes. On average, about one-third of state income comes from sales taxes on consumer items.

"When people are not buying homes, they are not buying appliances and furniture and other big-ticket items to go inside them," says Robert Ward of the Rockefeller Institute of Government in Albany, N.Y.

Also related to the diminishing sales-tax receipts is the dwindling equity in homes, exacerbated by the raft of foreclosures nationwide. Nevada, Florida, California, Arizona, and Michigan have been hit the hardest by declines in the housing market according to the number of houses and condos bought and sold.

"People use the equity in their homes as a cash machine by taking out additional home- equity lines … and when that is gone or tapped out, it means smaller lending support for consumer spending for all goods," says Mark McMullen, a senior economist in Portland, Ore., for Economy.com. "There is going to continue to be a headwind for consumer spending and job gains, both of which weaken the state tax base."

Both stock market and state spending up

Others are more sanguine, noting two trends: The stock market is doing well, and state spending in 2007 grew 8.6 percent over the previous year, two points above the 30-year average.

"Many states say they are experiencing uncertainty and a heightened awareness over dropping revenues, but no one to date is ringing the bell to say we are in deep trouble," says Arturo Perez, an economist with the National Conference of State Legislatures.

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