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US States Struggle to Balance Budgets - 2004-02-24

In this year's presidential contest the looming U.S. federal deficit has become a hot topic of debate. The deficit results from the federal government spending more money than it brings in through tax revenue, with the gap being bridged by bonds and other debt instruments. The 50 state governments, however, must struggle to find ways to balance their budgets. The latest report on state budgets shows improvement overall, but some states still face problems.

Most states see an improving budget picture this year, according to the latest budget analysis report by the National Conference of State Legislatures. The non-partisan organization that represents all 50 state government legislatures says that the budget shortfall that faced most states last year has subsided considerably and that 30 states may even have a modest surplus at the end of this year.

Arturo Perez, a fiscal analyst for the National Conference of State Legislatures, says the recent state budget gaps resulted from the economic slowdown of the past three years that reduced taxable earnings.

"The problems of the last two or three years have been pretty much summed up by an overall weakness in state revenue collections, primarily in personal income tax collections and in general sales tax collections as well," he said.

He says most states closed their budget gaps, not by raising personal taxes, but by cutting back on programs, tapping special emergency funds and raising excise taxes, which target specific products.

"The states have been reluctant to go after their primary source of revenues, which are personal income taxes and general sales taxes," he said. "We have had a couple of states that have raised one or both of those broad-based taxes. If you look at last year, we had 14 states that raised cigarette taxes and in the prior year we had 20 states that raised cigarette taxes".

The states have also been helped by federal action that provided $10 billion in relief for state Medicaid expenses and $10 billion for other purposes. Mr. Perez says some states still face problems with so-called "unfunded mandates." These are programs the federal government requires the states to implement, with the promise of federal funds.

"What states are arguing is that in many situations that federal support is far less than what was originally promised when these programs were developed," he said.

Mr. Perez says that as the economy picks up, most states should see an improvement in their tax collections. However, more than half the states predict shortfalls for their 2005 budgets. The new fiscal year begins on July 1 for all but a few states. There is a more than $35 billion cumulative budget gap projected for the next fiscal year. California, with its $15 billion shortfall, accounts for more than 40 percent of that.

Those states facing a budget shortfall are considering a range of options, from new taxes, college tuition increases and fee hikes to close their budget gaps.