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Economic woes hit state budgets

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

By Staff writer of The Christian Science Monitor / April 2, 2008

SOURCE: Individual state data analysis from the Rockefeller Institute of Government with legislated tax changes by the National Conference of State Legislatures and inflation data from the US Bureau o

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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.

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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.

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