NCPA - National Center for Policy Analysis


July 14, 2008

After years of operating comfortably in the black, state governments are grappling with deficits, says Kiplinger's Personal Finance.

Tax revenues are growing more slowly than last year -- or, in the case of sales taxes, declining.  At the same time, the costs of state and local governments are rising faster than those in the broad economy: 6 percent, versus 3.9 percent for the official overall rate of inflation.  As a result:

  • Some 23 states and the District of Columbia have dealt with or are still facing a combined shortfall of nearly $50 billion going into the fiscal year that starts in July (when many state budgets must be balanced).
  • Instead of raising taxes during an election year, states find it easier to tap rainy-day reserve funds, which are dwindling from their peak of 11.5 percent of state expenditures in fiscal 2006 to 6.7 percent in 2008.
  • Nevada is addressing a nearly $900 million shortfall for fiscal 2009 with a 4.5 percent budget cut and by depleting its reserve fund of $267 million.

Even if the U.S. economy improves before the end of 2008, states may struggle far longer, says Kiplinger's Personal Finance:

  • After the 2001 downturn, states ran budget gaps for three years, even though the recession lasted just eight months -- and that was with property taxes still going strong.
  • Now, as assessed real estate values catch up with dismal market realities, the hardest hit are the states where the housing bust has done the most damaged, such as Arizona, California and Florida.

Meanwhile, Alaska, Louisiana, North Dakota and Wyoming are fortunate because they receive taxes on natural resources, such as coal, oil and gas.  High soybean and corn prices are boosting states with agricultural economies, such as Iowa's.

Source: Anne Kates Smith, "States Scramble to Pay the Bills," Kiplinger's Personal Finance, August 2008.

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