States’ budget woes just starting

Associated Press

The recession is probably over, which means states’ financial troubles have only begun.

History suggests it could take six or more years for sales and income taxes — which make up roughly two-thirds of states’ revenue — to return to pre-recession levels. That could lead to deeper cuts to state jobs and services in order to maintain funding for core programs such as public schools and Medicaid.

What’s different from the three previous recessions, which took states three to five years to recover from, is that employment and consumer spending aren’t expected to bounce back as quickly.

To balance their budgets in the meantime, states are likely to raise taxes on the money people earn and spend; increase college tuition; reduce funding for the arts and other cultural programs; and push costs into the future by delaying pay raises for employees and repairs of government buildings. Some states, including Massachusetts, Missouri and Arizona, already are making or considering fresh cuts just months after lawmakers agreed on new budgets.

Rising unemployment and a decline in consumer spending have put a big dent in states’ tax revenues. Census figures show states’ income taxes plunged almost 28 percent in the second quarter of 2009, falling even further in places such as Arizona and California that were among the hardest hit by the housing-market collapse. States’ quarterly sales taxes fell almost 10 percent compared with the previous year.

Unlike the federal government, states generally must balance their budgets. That’s why one-third of states have raised taxes this year. They’ve hit the wealthy with income-tax surcharges, raised sales taxes that disproportionately affect the poor and targeted smokers, drinkers and motorists with higher taxes and fees.

Hundreds of thousands of state employees have been furloughed. And government “rainy day” funds have been diminished to half their highs of just three years ago.

Billions of dollars in federal stimulus money has enabled state lawmakers to maintain funding for programs such as Medicaid and public schools. But that emergency aid will run out long before the labor market improves and states’ budgets have healed. At that point, further cuts to less-vital services are a near certainty.

“Even though this national recovery will happen, state revenues are still going to be facing some pretty horrific times,” says Sujit CanagaRetna, a senior fiscal analyst for the Council of State Governments.

After the recession that began in July 1981, it took three years before states’ revenues fully rebounded, adjusting for inflation, population growth and tax increases, says Donald Boyd, a senior fellow at the Rockefeller Institute of Government at the State University of New York in Albany. He says it took states between four and five years to recover from the recessions that began in July 1990 and March 2001.

Based on that analysis, “I wouldn’t be surprised for it to take [states] six or seven years to get back to where they were” before this recession began in December 2007, he says. “What certainly is going to have to happen is several rounds of significant tax increases and, or, spending cuts.”

State lawmakers responded to the early 1980s recession with three consecutive years of higher taxes that, when compounded, amounted to a nearly 11 percent increase over the pre- recession tax levels, Boyd said. The early 1990s recession resulted in a similar three-year tax pattern that affected virtually all economic classes by raising levies on individual and corporate incomes, retail sales and motor fuel.