State budgets nationwide in prolonged slump

WASHINGTON -- State budgets are in their worst shape since World War II, prompting legislatures to institute the largest tax increases in a decade, the National Governors Association said Monday.

Soaring health care costs and a sputtering economy that hurt tax collections were blamed for the budget problems.

State lawmakers responded with $8.3 billion in tax increases for the fiscal year that began for most states on July 1. That was the largest dollar increase since 1992, when $15 billion in tax increases were enacted, the association reported.

The report found that 23 of 49 states raised taxes; Florida did not participate in the survey.

Cigarettes and other tobacco products saw the biggest tax increases, $2.9 billion, followed by sales taxes, $1.4 billion; corporate income taxes, $1.2 billion; and personal income taxes, $1 billion, according to the report.

Alcohol and gasoline were among other items that saw tax increases. More than a dozen states also raised various fees, including those for emergency services, driver's licenses and filing of court records.

"It's a pretty dire outlook for states," said Raymond C. Scheppach, executive director for the governors' group. "Unfortunately, even when the economy comes back, it will help, but I think states are going to continue in a very, very difficult situation for at least the next two or three years until, in particular, we get some major reforms in the Medicaid program."

Exploding health care costs, which generally make up one-third of state budgets, continued to outpace tax revenue for state governments, many or which already have cut services, combined programs and trimmed work forces to try to keep pace, the report said.

Spending on Medicaid, the program for the poor, elderly and disabled, accounted for the largest portion of health care costs. It grew 13.2 percent last year, the fastest growth rate for the program since 1992, the report said.

The Senate passed a bill last July to send states $9 billion in Medicaid assistance. The legislation received support from both Democrats and Republicans, passing on a 75-24 vote, but has stalled because the House has not passed a similar plan. The nation's governors are pressing lawmakers to revive the measure.

Revenue fell 6 percent

Scheppach said state revenue dropped last year by 6 percent, the first collective decrease since World War II. Nearly every state reported shortfalls at the end of the fiscal year, many even after dipping into rainy-day funds.

"We don't have an estimate of the total shortfall because states are going back now and re-estimating revenues in budgets," he said. "But my sense is probably we have a shortfall of at least $40 billion now. That's going to be a drain on the economy going forward."

The National Conference of State Legislatures reported last week that even after scaling back spending plans, states are seeing a $17.5 billion budget shortfall just three months into the fiscal year.

Another report released Monday said states saw a slight increase in tax revenue during the first quarter, but not enough to reverse the downward trend of the past two years.

The Nelson A. Rockefeller Institute of Government found increases in corporate and sales taxes, with a drop in personal income taxes. Though that added up to a 2.4 percent increase in state revenue from July through September, inflation and other legislative changes would erase most or all the gains, Rockefeller analyst Nick Jenny said.

Scheppach said state budget shortfalls could hurt residents in a number of ways, from tuition increases at state colleges to reductions in Medicaid benefits. State workers could lose jobs.

States are looking to the federal government for help, Scheppach said. About $3.5 billion has yet to be appropriated to states to help them enact homeland security measures, he said, and they are hoping to receive several billion dollars to institute changes in the way states must conduct their elections.

"The Fiscal Survey of States" is released twice a year by the National Governors Association and the National Association of State Budget Officers.