Budget woes looming beyond N.J.

Franklin Soto takes a break from his job, sweeping and mopping the bus terminals in Journal Square, to buy lottery tickets at least twice a day.

Sunday, however, was the first time in almost 30 years that he didn't hand over $10 to the Te-Amo cigar shop cashier. On Saturday, Gov. Jon Corzine (D) suspended all nonessential services in the state – including the lottery, which is run by state officials – because lawmakers failed to pass a budget.

"Why shut down the lottery? I don't understand what it has to do with the budget," says Mr. Soto.

Although New Jersey is one of the last states in the nation to resolve its budget problems this year, problems are looming for a rising number of states in coming years. They're facing structural deficits, meaning they are committed to spend more – especially in the healthcare and education sectors – than they are projected to collect. In these states, which include California and New York, residents will see either reductions in services or higher taxes if revenues don't grow.

"Many states out there are facing either short-term or long-term deficits that could affect their budgets," says Arturo Pérez, a fiscal analyst at the National Conference of State Legislatures in Denver.

In a survey in March, the NCSL found that at least 10 states expect to have deficits in 2007. The next year, the number jumps to at least 19.

"The survey gave us a sense that structural deficits have to be on states' radar screens," says Mr. Pérez.

For most states, the issue is not revenue. In fact, with the economy growing, many states are reporting a healthy revenue increase. California, for example, has unexpectedly seen a $7.5 billion surge in corporate income-tax payments, capital gains, and revenue from the red-hot housing market, says Pérez. The increase helped the state bridge its budget gap. "It made it easier to cut a deal," he adds.

But in the next year or two, California, like other states, will once again face the prospect of red ink, says Scott Pattison, executive director of the National Association of State Budget Officers in Washington. "There is a lot of K-12 [education] spending that is formulaic, coupled with healthcare inflation, which is fairly strong, Medicaid payments, health insurance for state employees, and healthcare for inmates," says Mr. Pattison. "The states have had a good run the last couple of years, but I think it will get worse."

In the case of New Jersey, Governor Corzine is prodding lawmakers to go beyond the usual. Tuesday, on the Fourth of July, when politicians prefer to be in their districts watching fireworks, Corzine had the Legislature in session in Trenton.

"What Corzine wants to do is match revenue and expenditures on a realistic estimate without gimmicks such as borrowing money from the tobacco fund or not funding pensions," says Ingrid Reed, who directs the Eagleton New Jersey Project at Rutgers University in New Brunswick. "Maybe the general public is not aware, but the budget has not been stable for eight years."

Last year, during the Garden State's gubernatorial race, Corzine promised an increase in state rebates to offset high property taxes – one of the most contentious issues in the state. His opponent, Doug Forrester, proposed a 30 percent cut in taxes in three years.

While the state may yet address the property-tax issue later in the year, Corzine is proposing that the state's sales tax increase from 6 to 7 percent. The speaker of the Assembly, Joseph Roberts Jr. (D), has said the residents are not ready for a sales-tax increase and the budget can be balanced other ways.

Behind his reluctance to raise taxes is the voters' reaction to the last major tax hike, during Gov. James Florio's term. The Democrats were voted out of office. "The legislators don't want that to happen again," says Ms. Reed.

The next general election is in 2007, but Corzine is not up for reelection until 2009.

The state, like others in the Northeast, is hard pressed to find more revenues. In the past, Reed points out, New Jersey has relied on tax hikes on the wealthy. "Now there are reports that high taxes are influencing wealthy people's decision on where to live," she says. Yet another sign that the tax-the-rich strategy is a problem: "The state has the largest decline of high-paying jobs. Most of the new jobs are lower wages," says Reed.

On the streets of Jersey City, residents are eager to see the lottery come back on line. And they seem resigned to some sort of tax increase. Lisa Brown, who works in New York City, says, "One percent sales-tax [increase] isn't anything ... [and] the lottery system contributes to the education services.... If 1 percent can take us out of the red, then it's OK with me."

Residents would also like to see the state find a way to lower their property taxes. Lucy Santiago has owned a two-story red house on Magnolia Avenue in Journal Square for 34 years. Every year, she says, there has been either a property-tax hike or the threat of one. Both she and her husband live on a fixed income and worry about the possibility of another property-tax increase.

"I would rather see a sales-tax increase than a property tax," she says. "Everything goes up, and it just stays there. It never comes down."