21 US States Facing Budget Shortfalls

by Mike Godfrey, Tax-News.com, Washington

17 January 2008

At least twenty-one states - including several of the nation’s largest - face budget shortfalls in 2009, according to a new report.

In the 14 of the 21 states that have already made specific estimates, the deficits are expected to total at least USD29 billion for fiscal 2009 - which begins July 2008 in most states - while another 5 states anticipate budget problems in fiscal year 2010, the Center on Budget and Policy Priorities stated in a report examining the short-term outlook for the states' public finances.

The report's authors, Elizabeth C. McNichol, a Senior Fellow specializing in state fiscal issues, and Iris Lav, Deputy Director of the Center, attribute much of the blame for the looming state fiscal crises to the bursting of the housing bubble, which has depressed state property tax revenues, as well as state sales tax revenues, as demand for household goods such as furniture, appliances and building materials declines.

The authors also warn that the situation could be exacerbated if unemployment rises, as states will collect less income tax, consequently depressing sales tax revenues further as consumption falls.

Because, unlike the federal government, states cannot run deficits in an economic downturn, the report concludes that they have three alternatives to alleviate budget pressures: draw down on rainy day reserves; cut expenditure; or raise taxes. However, the report notes that states have already drawn heavily on reserves, while cutting spending and/or raising taxes will merely serve to further depress local economies.

According to the Center, the 14 states in which revenues are expected to fall short of the amount needed to support current services in fiscal year 2009 are: Arizona, California, Florida, Iowa, Kentucky, Maryland, Maine, Massachusetts, Minnesota, Nevada, New Jersey, New York, Rhode Island, and Virginia. The budget gaps total USD28.9 to USD30.9 billion, averaging 8.5% - 9.1% of these states’ general fund budgets.

Another seven states have said that they will have deficits that will need to be closed for fiscal year 2009, but have not released information on the size of those deficits. They are: Alabama, Illinois, Michigan, Mississippi, Oklahoma, South Carolina, and Vermont.

Analysts in five other states - Connecticut, Missouri, Ohio, Texas, and Wisconsin - are projecting budget gaps a little further down the road, in fiscal year 2010 and beyond.

Some mineral-rich states, such as New Mexico, Alaska, Montana and Wyoming, are seeing revenue growth as a result of high oil prices, while other regions of the US are less affected by economic weakness. Nonetheless, the report forecasts that the list of states facing budget gaps is likely to grow as additional state budgets are released in preparation for the upcoming legislative session.

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