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Business Costs & Regulation

State Budget Problems Will Only Get Worse

Revenues aren't keeping pace with spending, no matter how many cuts states make.

For states wrestling with budget shortfalls, there’s no light at the end of the tunnel.

Their immediate problem is twofold: Tax revenues aren’t rising fast enough because too many people are jobless, and too few are spending.

See Our Slide Show: 10 Surprising Ways Your State May Tax You Next

And help from Washington is winding down. Most states survived 2009 because of the stimulus -- an infusion of about $230 billion, most of it with few strings attached. Making matters worse is a run on states’ social services as more people without jobs or health insurance seek help from public agencies. And most state rainy-day funds were emptied long ago.

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The result: Budget gaps that are opening faster than they can be filled. New Jersey’s new Republican governor, Chris Christie, bit the bullet and cut spending 9% to balance his fiscal 2011 budget, but already faces a $10.5-billion shortfall for 2012. Forty-six states had to revamp their budgets for fiscal year 2011 -- which started July 1 for most of them -- and 18 of them have gaps that are larger than 20%. Only Arkansas, Alaska, Montana and North Dakota enjoy black ink.

States have no choice but to slash spending, and they are -- big time. Forty-two are cutting state payrolls with some combination of layoffs, pay cuts and furloughs. Forty-one states are reducing funding for public universities and colleges. Thirty are cutting K-12 school aid. The same number are trimming health care.

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They’re also raising taxes: 17 nudged up sales taxes. Thirteen hiked income taxes, 22 raised excise taxes, and 17 hit businesses with higher rates or fewer breaks.

See our slide show: States Gunning for Your Money with Service Taxes

More creative solutions are in the works, including combining programs, applying more user fees, spreading the tax net to services and going after tax cheats. California and Florida are hiring more auditors to scrutinize returns. Georgia, New Jersey and New York are monitoring small businesses to make sure they’re not hiding income or siphoning off sales taxes. Louisiana is considering a tax on van and truck rentals, while Kentucky mulls an unpopular tax on golf greens fees. Oregon may tax commercial driver education and interior decorating. Iowa, Nebraska and Wisconsin will suspend various business tax breaks for biotech and drug research companies. California lawmakers even passed a bill to sell advertising on license plates, but dropped it when it was ridiculed by residents.

The states’ woes are sure to hamper economic growth. Total state and local spending accounts for 12% of GDP, so any significant pullback is sure to have an effect. And even when the economy improves, another problem looms large: Underfunded liabilities to provide retirement benefits for state employees. States are only beginning to wrestle with painful solutions to that potential crisis.

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