40 states bank on rising tax revenue in 2011, 1st Ld-Writethru

The vast majority of state governments are anticipating a rise in tax revenues this year after two years of sharp drops. Analysts caution that most states will face large budget gaps in the next few years.

Forty states forecast having an increase in tax receipts in the current fiscal year, according to a forthcoming report by the National Conference of State Legislatures. Slow economic growth is boosting proceeds from income and sales taxes.

That could reduce the impact of states' budget struggles on the economy. State budget shortfalls have led to widespread layoffs, tax increases, spending cuts and other measures that have restrained economic growth.

"We do think 2010 is the bottom and we are at a turning point," said Corina L. Eckl, director of the fiscal affairs program at the NCSL and author of the report.

Still, state officials aren't without enormous challenges. States will lose federal stimulus money in coming years and will struggle to close large budget gaps. Tax revenues are well below pre-recession level. High unemployment puts heavy demand on state-run social service programs.

"Stability and growth in tax collections is very good news," the report said. "But in the near term it will not be enough to propel states out of their fiscal difficulties."

Overall, states raised taxes and cut spending to eliminate budget gaps that totaled $84 billion for fiscal year 2011, which in most states began July 1. The NCSL forecasts a total gap of $72 billion in fiscal year 2012 and $64 billion in 2013. That means more job cuts and tax increases could still be needed.

Meanwhile, the Nelson A. Rockefeller Institute of Government said in a report last month that state tax collections rose in the April-June period. But they are still about 17 percent below the same period two years earlier.

Many states project it will take years for tax revenue to return to where it was before the recession began. Sixteen states say it will take at least two more years — until fiscal year 2013 or 2014 — while four states don't expect to return to pre-recession levels until fiscal 2015. California doesn't expect revenues to return to their peak levels for five more years, or fiscal 2016. That's the longest of any state.

State budget struggles have held back the economy, even after the recession ended in June 2009. State governments have cut 43,000 jobs since August 2008. Cuts in services and funding for local education have led to thousands of additional cuts at local schools and among private contractors doing business with the states. In previous downturns, state government employment has been a relatively safe haven.

States have also raised tax rates and cut spending to make up for lost revenue. Both moves can further slow economic activity. Half the states raised taxes in 2009 by a total of $28.6 billion, the NCSL report estimates.

Cuts in state and local spending reduced economic activity for three straight quarters, from the middle of last year through the first quarter of 2010, the Commerce Department estimates.