States' revenue shortfalls may outlast recession
Lack of jobs, retail slump cut tax levies
NEW YORK - Even after $135 billion in federal aid is spent, many states will be staring down budgetary black holes unless they initiate dramatic spending cuts or tax increases, or both.
In the short term, the massive stimulus will help balance budgets and keep key services, such as Medicaid, going. But many economist believe the money will not quickly eradicate high unemployment, low consumer spending, or distress in the housing market - the triple threats behind the state tax-collection shortfall.
The decline in state tax revenue is expected to drag on even after the economy begins to rebound. Without higher taxes, bigger cuts to government services, or more federal funding, the states face budget gaps that could reach $120 billion nationwide in their 2011 budgets, according to the Rockefeller Institute, a think tank in Albany.
James Diffley, managing director of Global Insight's US Regional Services Group, says it is unlikely that budget gaps will close before 2013.
"States' budget problems lag the economy," Diffley said. "What we see in budgets will get worse for at least another year."
Ben Bernanke, the chairman of the Federal Reserve, told Congress last week that the recession might end this year if the government is able to prop up the shaky banking system.
States simply are not taking in enough money to cover expenses that are rising with the recession. So far, neither the spending cuts nor the tax and fee increases being discussed appear large enough to address the impending revenue shortfall, economists said.
Spending increases were easier to cover in flush times this decade, when tax collections jumped 40 percent over five years. Then the bubble burst. Inflated housing wealth collapsed, consumers hunkered down, businesses slashed jobs, and tax collections plunged.
Sales and income taxes can provide about two-thirds of tax revenue. Other revenue sources, such as the real estate fund transfer tax, continue to take hits, too, as the housing market scrapes bottom.
States' combined deficits have already climbed to about $50 billion in their 2009 budgets and are expected to grow in the following budget cycle, leaving governors and lawmakers with more painful choices, such as education cuts and layoffs.
"They're going to have to cut their budgets significantly," said Mark Vitner, senior economist and managing director at
In Massachusetts, the highest expected deficit for the 2009 budget year could be $2.4 billion, or 8.5 percent of the budget, according to figures presented to the National Conference of State Legislatures.
California lawmakers struggled to reach a deal to raise taxes, borrow money, and cut services to close a multiyear $42 billion deficit. About 1.7 million Californians are out of work, which means less income tax revenue.
Even wealthy people with steady work are earning less taxable income because investment income is down. Losses for high earners add up fast because of progressive tax rates - a loss of $1 million in capital gains can hurt a state treasury more than dozens of workers losing $40,000-a-year jobs.
New York and other states dependent on finance will be hardest hit, but many states will feel the pinch, said Scott Pattison, executive director of the National Association of State Budget Officers. Governor Tim Kaine of Virginia recently warned that losses in investment income could expand the state's shortfall.
The reduction in Wall Street bonuses alone will cost New York nearly $1 billion in personal income tax revenues, State Comptroller Thomas DiNapoli said.
Analysts say it is likely that many quarterly filers overestimated their capital gains and other investment income. That could sharply drive down states' tax collections in the final quarter.
"It's probably going to be bad in April," said Donald Boyd, senior fellow at The Rockefeller Institute. "And it's probably going to be bad a year from April."
Lost income, lower wages, and job security fears are in turn sapping demand for retail goods.
In Missouri, where the unemployment rate is 7.3 percent, sales tax collections fell 12 percent in January from a year earlier. In Georgia, where the unemployment rate is 8.1 percent, sales taxes dropped 17 percent in December.
Consumers are putting off purchases of big-ticket items like cars, which can account for about 10 percent to 20 percent of a state's sales tax revenue. J.D. Power and Associates forecasts 1.8 million fewer cars will be sold this year compared with last year - a multibillion revenue drop that would inflict pain beyond the teetering auto industry.
