WASHINGTON — States will struggle with finances in fiscal 2011 just as much as they have this fiscal year and last fiscal year, panelists said at a meeting here Friday sponsored by Tax Analysts.
As a solution, states should broaden their sales tax bases, make personal income taxes more progressive, and scale back some corporate tax credits, said Nicholas Johnson, director of the state fiscal project for the Center on Budget and Policy Priorities
Year-over-year spending for states had been growing at about 6% until the economic downturn hit, said Scott Pattison, executive director of the National Association of State Budget Officers. This fiscal year's spending growth is at negative 5% and is expected to be negative in fiscal 2011 as well, he said.
Pattison said states are also anticipating the recovery "cliff" in 2011 — when they begin to lose the federal stimulus funding and programs enacted under the American Recovery and Reinvestment Act of 2009.
States have been forced to drain their rainy-day funds as a result of diminished tax revenues. Excluding Texas and Alaska, the relatively strong rainy-day funds of which now constitute about half the national aggregate amount, rainy-day funds have dropped to an average of 2% of general fund revenue.
"Clearly states didn't put enough into their rainy-day funds," Johnson said. However, states would have had to "sock away" half of their general fund revenues for a year to make it through unscathed, he said.