Both companies have their headquarters in Michigan, and the clear goal of such a merger would be to save billions in cost through amalgamation of plants and internal departments, leading to tens of thousands of job losses. Some analysts estimate that more than 30,000 of Chrysler's 66,000 employees would lose their jobs in a merger, and many thousands more back in the supply chain.

As the centre of auto-manufacturing in the US, Michigan has already suffered from substantial cut-backs, and has one of the highest foreclosure rates in the country. The State's unemployment rate in August was 8.9%, the highest in the US.

Chrysler's direct tax contribution to its municipality may be only a few millions of dollars, but that figure is multiplied tenfold when account is taken of sales taxes foregone and income tax that will no longer be collected from so many workers.

Michigan was already listed as fiscally threatened in a recent report by the Rockefeller Institute of Government which suggests that US state governments are edging ever-closer to a revenue-precipice, with the rapidly-weakening US economy expected to close off the gusher of income and sales tax revenues that has kept many a state budget afloat until now.

The Institute's 2nd quarter state tax collection update indicates that, while income tax revenues remained fairly healthy earlier this year, tax collections were "superficially strong" with states effectively living off the US economy as it was in 2007.

“As noted in our report last quarter, April-June tax collections reflected strong payments with income tax returns for 2007 due on April 15 — last year’s economy is doing well,” said Rockefeller Institute Senior Fellow Donald Boyd, co-author of the report. “But payments based on current economic activity have been much weaker.

“Superficially, tax collections appeared to be doing okay — certainly not the leading edge of a fiscal crisis. But below the surface, great trouble is brewing,” Boyd added. “Some states have already made mid-year budget cuts, and more widespread cuts are virtually certain as revenues deteriorate further.”

Current indicators show that overall state tax collections in the third quarter will weaken considerably, according to the Institute.

On top of the current tax picture, Boyd said the prices state and localities pay for goods and services rose by 6.6% during the second quarter, 4.6% higher than economy-wide inflation — the largest such difference in 60 years.

“States are again facing the classic nutcracker effect of slowing revenue and rising prices,” he said.

According to the report, Arizona, California, Florida, Michigan, and Rhode Island have been suffering the most. It is expected that these fiscal problems will spread to Connecticut, New Jersey, and New York, due to those states’ reliance on the financial services industries and steeply progressive income taxes that extract much of their revenue from individuals with high wages and investment income.

“These states — in addition to California — are expected to face extreme difficulty in the wake of the financial services industry meltdown,” Boyd said.