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Economy may be rebounding, but state budgets are still hurting

All but one state (Vermont) saw tax collections and other funds fall for the second quarter in a row. Over the past year, they’ve lost more than they got in federal stimulus money.

By Daniel B. WoodStaff writer / October 16, 2009

Michigan lawmakers (at left) have struggled to deal with a nearly $3 billion shortfall. Many states have seen tax revenues fall sharply this year.

Al Goldis/AP

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Los Angeles

This week’s welcome news that the Dow topped 10,000 for the first time in a year – alongside comments by many economists that the recession is over – does not spell quick relief in one key corner of the US economy: state budgets.

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That’s the assessment of a new study, released Thursday by the Nelson A. Rockefeller Institute of Government, which shows that state revenues plummeted for the second quarter in a row – this time a record 16.6 percent.

Total state tax collections declined by $63 billion, or 8.2 percent, from the previous year, roughly twice the amount states gained in fiscal relief from the federal stimulus package. Forty-nine states saw total tax revenues fall during the quarter, with 36 states reporting double-digit declines.

Regionally, Alaska fared the worst with a drop-off of 86.5 percent, due to recent drops in oil prices. And Vermont fared the best with a 2.2 percent growth in tax revenues primarily due to a one-time estate-tax settlement.

“It’s really rough out there for states,” says Scott Pattison, executive director of the National Association of State Budget Officers. Part of the problem, he says, is the declines have come on top of declines in past years. [Editor's note: The original version misstated Mr. Pattison's first name.]

“Many of these states had to cut to the bone last year and then turn around and do it again,” he says. “That’s hard to do.”

There will be a long lag time between general signs of recovery, such as the return of consumer confidence, and the return of tax revenues that will help states get back on their feet, say Pattison and others.

“Some elements of the economy that are very important to state finances – particularly employment and wages – are likely to recover more slowly than gross domestic product,” say the authors of the Rockefeller Institute report, Lucy Dadayan and Donald J. Boyd.

“In addition, state tax revenue, when it does begin to recover, will be below its earlier peak for at least several years and will not be sufficient to support spending commitments that are now in place," they write. "Despite the recovery, most states will face budget gaps this fiscal year and next, and probably for at least one to two additional years.”