Sinking revenue squeezes state budgets further

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July 17, 2009 The first three months of 2009 hosted the steepest decline on record of state tax revenue in the United States, falling 11.7% and according to a report, collections are weaker since.[1]

Financial pressure

The Wall Street Journal reports that the stressful drop will likely force many states to revisit their budgets later in the fiscal year, which has been a struggle thus far.

On Wednesday night, Illinois Governor Pat Quinn signed a $26 billion general-fund budget that depends heavily on borrowing. The Wall Street Journal reports that the budget pushes off a reckoning with serious fiscal problems.

Forty-five states have seen revenue declines of about 20% according to those that have reported taxes for April and May, compared with the same period a year ago. The Nelson A. Rockefeller Institute of Government at the State University of New York reported this as well as other observations. This report was released today.

"Such extraordinary weakness in revenues, along with continued if more moderate growth in expenditures, make widespread budget shortfalls highly likely this year," the report said.

Compared with a year ago, states' collections of corporate income taxes were down 18.8% in the first quarter. Personal income taxes dropped 17.5% and sales taxes declined 8.3%.

After sharp declines in income and sales taxes, state tax revenues were at 2005 levels in the first quarter. This backtracked on about three years of gains that paid for new programs and salary increases.[2]

Illinois

Illinois had to borrow $3.5 billion to fund operations and postpone $3.2 billion in vendor payments to pass the budget this week.

The Governor and state lawmakers acknowledged that the estimated $11.6 billion deficit Illinois was facing has still not been addressed in this budget. Quinn (D) took over January 29 following the impeachment and removal of Governor Rod Blagojevich.

"This budget is the best we can do," Quinn said. "It will probably be the most frugal year in Illinois history."

In the coming fiscal year, Quinn and lawmakers will take 12 furlough days as well as hold discussions with union leaders about saving money. This plan-making may include laying off workers or revoking scheduled salary increases.

Unemployment increased to 10.3% in Illinois in June from 10.1% in May.

Attributing some of these problems to the state's long-term budget issues, Moody's Investors Service placed Illinois's A1 general-obligation bond rating on review for a possible downgrade Thursday.

The weeks-long budget impasse in Illinois was caused by lawmakers blocking Gov. Quinn's plan for a 50% increase in the state's income-tax rate, from 3% to 4.5% for individuals.

Quinn began the summer vowing to fight tax increases, warning that social security spending could be cut in half if the state lawmakers don't accept his proposal, yet he eventually retreated. In a news conference, he said he will continue advocating a broad tax increase.

Illinois Senate President John Cullerton (D) said Wednesday that he expects the legislature to reconsider the tax proposal in January. "Now it's even more obvious that we need a tax increase just to pay our bills," he said.

Other states

California lawmakers are close to a compromise on filling a $26 billion deficit by trying to repair most of the problem with one-time fixes and accounting maneuvers. The sunshine state has a few months' reputation of falling short of forecasts, making it likely that the lawmakers and Governor Arnold Schwarzenegger will be considering more budget fixes soon.

Ohio Governor Ted Strickland proposed adding slot machines to horse-racing tracks. He estimates the maneuver will raise $933 million in new revenue. The state legislature was gridlocked before a compromised was approved Monday after several weeks. Religious groups and other constituents say the state can expect lawsuits to block the expanded gambling. This could hold up the program and force lawmakers to consider other revenue sources, the Wall Street Journal reports.[1]



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