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Tax hikes and budget woes: States crunched

States are still struggling to balance their budgets as fiscal year 2010 starts. New tax hikes and spending cuts take effect. And California is running low on cash.

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By Tami Luhby, CNNMoney.com senior writer

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NEW YORK (CNNMoney.com) -- It's not a happy new year for the states.

States are carrying their financial woes into the new fiscal year, which for most started on Wednesday. Some had yet to pass their fiscal 2010 budgets. For others, tax hikes and draconian spending cuts went into effect.

Governors and legislators spent fiscal 2009 wrestling to balance budgets as tax revenues plummeted amid the weakening economy. Many were forced to slash funding for social services, education and public safety, as well as raise sales levies, income taxes and other fees.

Fiscal 2010 is not looking much better, experts said. New budget gaps opened up even before the year began.

"The economy is not out of the woods so states are not out of the woods," said Bert Waisanen, fiscal analyst with the National Conference of State Legislatures.

A half-dozen states entered the new year without budgets in place.

"They are dealing with some very difficult fiscal decisions," Waisanen said.

California is suffering particularly acute problems. The state is days away from having to issue IOUs as the governor and legislators continue to battle over closing a $24 billion budget gap. Though the Golden State passed its budget in February, new shortfalls have forced officials to come up with a new spending plan.

It faces a cash deficit of $2.8 billion in July that will grow to $6.5 billion by September. The state's controller calls it the worst shortfall since the Great Depression.

States that enter the new fiscal year without a budget could be forced to shut down services unless they pass temporary spending bills, or have provisions that allow for continued funding of state services and agencies.

Partial shutdowns took place in Michigan and Pennsylvania in 2007, in New Jersey in 2006 and in Minnesota in 2005. In the latter three cases, workers were furloughed until a budget agreement was reached. Michigan's impasse lasted only four hours.

Ohio legislators, for instance, passed a seven-day temporary budget on Tuesday to keep the state operating. Pennsylvania's budget stalemate means that state workers may not be paid starting in mid-July.

New taxes take effect

More than half the states have raised taxes in 2009, and some of the increases will take effect on July 1, according to the Center on Budget and Policy Priorities, a Washington group that tracks state budgets and spending.

For instance, smokers in Colorado will now pay sales tax on their cigarette purchases. Florida residents will have to fork over an additional $1 in cigarette taxes.

Vermont is extending sales taxes to digital downloads and liquor purchases, while Hawaii increased its hotel room tax by 1 percentage point to 8.25%.

Nevada residents will now pay 6.85% in sales taxes, up from 6.5%, and businesses with payrolls greater than $250,000 will pay a 1.17% tax, up from 0.63%.

Massachusetts Gov. Deval Patrick Monday signed a fiscal 2010 budget that included a 25% sales tax increase that goes into effect on Aug. 1.

"They need to raise taxes to bring their budgets back into balance," said Nick Johnson, director of the center's state fiscal project.

Though public officials are reluctant to raise taxes in a recession, many found they had to after slashing spending. Some 10 states proposed increasing personal income taxes and eight looked at hiking corporate taxes, according to the National Association of State Budget Officers. Income taxes often take effect Jan. 1.

With tax revenues continuing to plummet, experts see more tax increases and spending cuts ahead, though they may not be as severe as the measures enacted over the past year.

"We're a little more stable now, but we don't have any guarantees," said Waisanen of the state legislative conference.

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