Recession's end marks start of state budget woes

By David A. Lieb

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 to 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, hiked 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.  ....