State budget gaps widening as economy slumps

States ended the 2007 fiscal year with some $69 billion in reserves — or about 11 percent of their budgets — the most ever, according to the CBPP, which tracks fiscal policy and the impact on people with lower incomes. But many have already dipped into those reserves — even before the worst of the downturn has hit. Some 27 states are already in the red by more than $12 billion, and the CBPP estimates that the cumulative budget gap for states in 2010 will hit $100 billion.

State revenues are getting hit hard on several fronts at once:

• With job losses rising, income taxes are falling. The projected continued rise in unemployment will cut further into state revenues.
• The collapse of the financial markets hits two ways. First, it lowers revenues in states that tax investment income. Second, states whose economies are heavily reliant on the financial services industry will see taxes from those businesses dry up. Roughly a third of Delaware’s gross state product, for example, is based on the finance and insurance industries. New York state is also bracing for a big hit from the stock market collapse.
• A sharp slowdown in consumer spending is hitting sales taxes revenues. If the economy worsens, consumer spending may slow further.
• Lower demand for gasoline has shrunk receipts from gas taxes. Though pump prices have fallen sharply in recent weeks, it’s not clear that consumer demand for gasoline will rebound.

Job losses also are raising states' costs. The rise in layoffs has stretched state-run unemployment insurance funds, some of which are running out of money. Five states —Michigan, Indiana, New York, South Carolina and Ohio — have less than three months' worth of payments left, according to the National Employment Law Project. Further job losses put those states' funds closer to going broke.

Another eight states — New Jersey, California, Kentucky, Missouri, Wisconsin, North Carolina, Rhode Island and Arkansas — have just enough left for four to six months, according to NELP.

Some households suffering a job loss also lose health care insurance. Low- and moderate income families who lose company-provided health care are turning to state-administered Medicaid programs, which are jointly funding by the state and the federal government.

“Medicaid is certainly going to be a target because it’s so big," said Boyd. "It’s also very, very hard to cut because so much of it is for extremely sick people.”

To be sure, some states are faring relatively well because they rely on other sources of revenues besides incomes and sales taxes. States with large oil and gas resources, including Alaska, Texas and Oklahoma, have seen their revenues hold up relatively well. But the recent plunge in the price of oil may cut onto those funds as well.

For those states facing shortfalls, budget gaps will have to be closed with more spending cuts, higher taxes or a combination of both.

But tax increases are extremely unpopular, and many state officials are promising to do everything they can to avoid them, especially during an economic downturn.

In Louisiana, Gov. Bobby Jindal says the state will close its $1 billion budget shortfall with “very real budget reductions” — but no new taxes.

“Our administration will not be supporting any tax increases to close this gap,” he said last week. “Let me take that option off the table.”

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