States’ red ink augurs cuts, higher taxes

Gov. Martin O’Malley

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To raise taxes or cut services, that again will be the question for governors dealing with hobbled budgets heading into the 2011 fiscal year, a new study by two lobbying groups for state governments shows.

The report by the National Governors Association and the National Association of State Budget Officers says states are expected to have only modest revenue growth in the 2011 fiscal year, which for most states begins July 1, and none is expected to see significant recoveries until 2012 or 2013.

“Although the nation’s economy shows signs of improvement, state conditions continue to deteriorate,” according to the report. “Unfortunately, states will have to make additional spending cuts or increase taxes to close their budget gaps.”

The report comes as Capitol Hill lawmakers look for ways to help state governments weather the economic storm. The $135 billion in federal stimulus money that propped up state budgets ends in 2011. Much of the Recovery Act funds spared cuts to education and Medicaid, the report states.

“There are budget problems in 46 states,” said Scott D. Pattison, NASBO executive director. “It’s across the board, unlike previous times when you could just point to the Midwest, where states rely on the auto industry.”

The financial hardships in such states as California and New York in fiscal 2010 were largely attributed to a roughly 12 percent decrease in tax revenue since 2008, according the report.

That money is largely composed of sales and corporate taxes, as well as personal income taxes, which decrease when fewer residents collect paychecks. Those taxes account for roughly 80 percent of a state’s general revenue fund.

The biennial 48-page report also found states faced a collective budget gap of $296.6 billion since fiscal 2009 and still face a $127 billion gap in the next two years, despite spending cuts and tax increases.

In New York, for example, Gov. David A. Paterson a Democrat, recently announced a plan to lay off thousands of state workers to help cut the state’s $9.2 billion shortfall.

At least 40 states were forced to make midyear budget cuts. Fiscal 2010 ends June 30 for 46 states.

States are collectively spending roughly $75 billion less this year than they did in 2008, according to the report. However, raising taxes this year will be difficult for governors facing re-election.

In Maryland, for example, Gov. Martin O’Malley, Democrat, faced a roughly $2 billion budget gap in fiscal 2011 and is facing a challenge from former Gov. Robert L. Ehrlich Jr., a Republican.

Mr. O’Malley is closing the gap with a mix of cuts to programs, payrolls and agency budgets.

“There are no intentions or plans to raise taxes,” said O’Malley spokesman Shaun Adamec. “Revenue projects are up, and there doesn’t appear to be a need for it.”

Though the report did not list the states with the biggest gaps, a recent National Conference of State Legislature report found Illinois, Nevada, New Jersey and Minnesota with highest projected shortfalls in fiscal 2011, as a percentage of their overall budgets.

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