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State Budgets Hit Hard By Housing Bust, Slowing Economy

Back on January 28, I read in Bloomberg that the Washington D.C.-based research group The Center on Budget and Policy Priorities announced half of all U.S. states were projecting budget deficits for the next fiscal year as the U.S. economy slows and tax revenue disappears. According to their report (revised on February 1):

At least twenty-four states, including several of the nation’s largest, face budget shortfalls in fiscal year 2009. Of these 24 states, 20 have already made specific estimates; the combined deficits of these 20 states are expected to total at least $34 billion for fiscal 2009 — which begins July 2008 in most states. Another 3 states expect budget problems in fiscal year 2010, although some of those gaps may occur earlier than expected. Many of the other states have not yet released information about their fiscal status.

The center explained why this was happening:

The bursting of the housing bubble has reduced state sales tax revenue collections from sales of furniture, appliances, construction materials, and the like. Weakening consumption of other products has also cut into sales tax revenues. Property tax revenues have also been affected, and local governments will be looking to states to help address the squeeze on local and education budgets. And if the employment situation continues to deteriorate, income tax revenues will weaken and there will be further downward pressure on sales tax revenues as consumers become reluctant or unable to spend.

The slower growth in tax receipts is coming at a time when state lawmakers hammer out spending plans for the next fiscal year, which begins in July for all but four states. According to the center, states, unlike the federal government, typically cannot borrow all the money they need when revenues fall short, which leaves them with no other choice but to draw down reserves, cut spending, and/or find new sources of money (new taxes) . In California, which faces a $14.5 billion deficit, Governor Arnold Schwarzenegger has proposed releasing prison inmates early and closing state parks, in addition to selling $3 billion of bonds to help pay the bills. A number of states are getting creative when it comes to finding new sources of funds. In a January 28 article entitled “Cash-Strapped States Resort to Odd Taxes,” Michael Gormley of the Associated Press wrote:

Need a few million dollars to fill a budget deficit? Lease a toll highway, like Indiana and Virginia did, or cash in on future lottery profits as a half-dozen states are considering. You could slap a tax on pornography as six states already have, or tax strip joints like they do in Texas, where they call it a “pole tax.”

Some states take a slice out of pumpkin sales at Halloween. And most states tax Shaquille O’Neal and Barry Bonds when they visit, using a “jock tax” on professional athletic events.

Amused? That will cost you, too. Many states collect an amusement tax for live performances.

Nate Bailey, of the nonpartisan Tax Foundation, had this to say about the new funding initiatives. He told the Associated Press:

They range from the outright crazy to the absolutely insane. People at the local level already feel overtaxed and politicians, in a somewhat spineless way, look for a hidden way to increase revenue without raising taxes.

Shortfalls are anticipated to be significant in states whose economies were driven by the recent housing boom. Arizona is expecting a budget deficit of between $1.3 billion and $1.7 billion, or 12.1% to 16.2% of its FY 2008 general fund. Nevada is forecast to have a shortfall of $565 million, or 7.8% of its budget.

Back on October 11, 2007, I talked about a Retuers article which noted half of all U.S. states were collecting less from their sales taxes than expected, which could signal a recession was ahead. I wrote:

Philippa Dunne is a co-editor with the New York-based Liscio Report, which was founded by veteran bond-market reporter John Liscio in 1992 on the belief that real time information on monthly state tax receipts is crucial to understanding the state of the United States economy. Ms. Dunne said that, “There are a lot of unknowns, but the state sales tax receipts are pretty much at recession levels.” She added that about 25 states are seeing disappointing sales tax revenues. How sales taxes perform is one way to judge a region’s economy since the data is released promptly and reveals consumer spending trends that are otherwise hard to discern, according to Goldman Sachs in a July 2007 report.