More Red Ink Forecast for States in Coming Year

State governments are projecting a collective deficit of at least $32 billion next year, which is less than half as much as this year’s aggregate red ink, according to a new report from the Center on Budget and Policy Priorities, a Washington, D.C., think tank which researches policies that affect low-income people.

But the Center’s report is not good news. It expects the collective deficit figure to grow as more information becomes available, and it foresees a fourth straight year of program cuts, tax and fee increases, and other budget-balancing maneuvers.

“The state fiscal crisis is not over. It is unlikely that this will turn around very much until we have some significant increases in employment and a better recovery in the stock market,” said Iris Lav, the Center’s deputy director.

Lav said most states are experiencing moderate tax revenue growth, but that this growth isn’t strong enough to cover state obligations. She said next year’s budget problems are due mostly to state lawmakers’ heavy reliance on one-time fixes to balance their budgets over the past few years.

These one-time fixes include the $20 billion that moderate members of Congress secured for states in return for backing President George W. Bush’s $350 billion tax cut program. The temporary fixes also include deferred pay raises for state employees, money from the 1998 legal settlement with tobacco companies, and accounting tricks that shift revenues from one year to another.

“The states by and large are projecting reasonable revenue growth. So a lot of these new deficits are the result of carry-forward problems, where the states have done something to cause themselves a future hole,” Lav said.

The Center’s report includes data from 21 of the nation’s largest states. Analysts at the Center expect the collective deficit figure to grow by a few billion dollars as more states unveil budget figures for fiscal year 2005, which begins July 1, 2004, for all but four states.

Although deficit problems vary greatly from state-to-state, the highest-income states continue to be plagued by the largest deficits, mostly due to the decline in capital gains taxes from the slumping stock market.

For example, California Gov.-elect Arnold Schwarzenegger (R) will have to grapple with an $8 billion deficit next year, roughly 11 percent of the state’s budget, according to the Center’s report. Another wealthy state, New Jersey, faces a $4 billion deficit next year, about 17 percent of the Garden State’s budget.