Reeling states hit by April tax shortfalls

States struggle to close new shortfalls before fiscal years end in June. Too late for spending cuts, states must tap into reserves or federal stimulus funds.

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By Tami Luhby, senior writer

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NEW YORK ( -- State officials nationwide are wrestling with yet another round of budget shortfalls, this time due to plummeting April income tax revenues.

The latest gaps are proving more of a challenge. Most states close their fiscal years at the end of June, so they have limited ways to balance their budgets at this point. Unlike the federal government, states can't run a deficit.

Most are looking to tap rainy day funds or use federal stimulus money to shore up their finances, since spending cuts or fee hikes won't bring in the bucks in time. The problem is that many states were counting on those funds to balance their fiscal year 2010 budgets.

"There's just no simple way to deal with this," said Sue Urahn, managing director of the Pew Center on the States, a policy group. "They are trying to cobble together things from several places, but at some point they run out of fingers to plug the dike."

Over the past two years, as the economy has weakened, states found their tax revenues were coming in below estimates. These shortfalls led to a cumulative budget gap exceeding $100 billion for fiscal year 2009, according to the National Conference of State Legislatures. As a result, states have had to slash spending on social programs and education, lay off or furlough state workers and raise fees and taxes -- some multiple times over the past year.

Federal stimulus money has helped soften some of the cuts, experts said. But the revenue shortfalls continue to widen.

The latest blow came from the April 15 income tax returns, which states are tallying now. The weak stock market has decimated capital gains tax revenue, upon which many states depend, experts said.

Already, several states have found revenues coming in well below estimates, prompting officials to scramble to close gaps. Massachusetts and Ohio, for instance, are facing new gaps that could exceed $900 million each. New Jersey is looking at a $500 million shortfall after a government report predicted revenues will come in $1.2 billion below projections, in large part because of sagging income tax revenue. In other states, officials will huddle in coming days and issue new budget estimates.

"This is exactly the point when states are on the tenterhooks," said Donald Boyd, senior fellow at the Nelson A. Rockefeller Institute of Government, a public policy group. "This can be overwhelming."

States' shortfalls

In Massachusetts, April tax revenue came in $953 million, or 35%, less than a year ago. Officials had anticipated that revenue would fall, but it came in $456 million below their most recent estimate, made on April 15. The bulk of the shortfall came from a $905 million drop in income taxes.

The state, which has already dealt with a $3 billion budget gap since the start of the fiscal year, now has to come up with nearly $1 billion before June 30. It will likely have to turn to its $1.3 billion rainy day fund and draw from its nearly $1 billion federal stimulus allotment designed to maintain state support of education and public services.

"We've reached the cliff much faster than anyone expected," said Cyndi Roy, budget spokeswoman for Gov. Deval Patrick. "We don't have anywhere else to cut."

The governor should provide more details on shoring up the budget by week's end, Roy said. Patrick will also have to lower revenue estimates for his 2010 budget and make more spending cuts.

Ohio, meanwhile, saw income tax revenue come in 22% below projections. Through April, income tax receipts are $397 million below the current estimate for fiscal 2009. It's the worst drop in the state's history.

This means the state is facing a budget shortfall that could exceed $900 million, according to Gov. Ted Strickland's office. He's already cut nearly $2 billion from the state's biennial budget, which runs from July 1, 2007 through June 30, 2009. And last month, he ordered additional restrictions, limiting spending on contracting, supplies and services to critical needs only.

Still, it's not enough.

"Even though we have reduced state government spending by nearly $2 billion this biennium, we are now faced with even steeper revenue shortages," Strickland said Tuesday in a statement.

Ohio will likely have to tap into its $948 million rainy day fund to carry it through the rest of the fiscal year, which ends June 30.

More cuts in Michigan

Unlike its 46 peers whose fiscal years end on June 30, Michigan has until the end of September to balance its budget. But the tax shortfalls have been no kinder to the Wolverine State.

The state revised its revenue estimates downward in January, but the numbers are coming in "way below" those figures, said Liz Boyd, spokeswoman for Gov. Jennifer Granholm. State general fund revenues are projected to decline 21% from fiscal 2008, by far the largest one-year decline in at least 50 years. New estimates will be released mid-month.

This forced the governor to announce Tuesday a $350 million spending cut, including a 4% across-the-board reduction.

"Michigan government can no longer afford to be all things to all people," Granholm said in a statement. "We expect to have to make more cuts like these in the future, which are the very type of wrenching cuts we have worked so hard to avoid in the past."

The pain will be widespread. Adults on Medicaid are losing dental and vision coverage. New state trooper graduates are losing their jobs, and local communities are losing 1/3 of their remaining state revenue-sharing funds.

At least one expert on states' budgets, however, sees some hope in the coming year. While most will continue to face revenue declines, states aren't as likely to have to revise their estimates downward every few months like they did this year as the national economy collapsed, said Sujit CanagaRetna, senior fiscal analyst at the Council of State Governments, a research group.

"Fiscal year 2010 will not be as severe or dire as fiscal year 2009, but we'll still see shortfalls," he said. To top of page

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