The decline in state tax revenue is expected to drag on even after the economy begins to rebound. Without higher taxes, bigger cuts to government services, or more federal funding, the states face budget gaps that could reach $120 billion nationwide in their 2011 budgets, according to the Rockefeller Institute, a think tank in Albany.
James Diffley, managing director of Global Insight's US Regional Services Group, says it is unlikely that budget gaps will close before 2013.
"States' budget problems lag the economy," Diffley said. "What we see in budgets will get worse for at least another year."
Ben Bernanke, the chairman of the Federal Reserve, told Congress last week that the recession might end this year if the government is able to prop up the shaky banking system.
States simply are not taking in enough money to cover expenses that are rising with the recession. So far, neither the spending cuts nor the tax and fee increases being discussed appear large enough to address the impending revenue shortfall, economists said.
Spending increases were easier to cover in flush times this decade, when tax collections jumped 40 percent over five years. Then the bubble burst. Inflated housing wealth collapsed, consumers hunkered down, businesses slashed jobs, and tax collections plunged.
Sales and income taxes can provide about two-thirds of tax revenue. Other revenue sources, such as the real estate fund transfer tax, continue to take hits, too, as the housing market scrapes bottom.
States' combined deficits have already climbed to about $50 billion in their 2009 budgets and are expected to grow in the following budget cycle, leaving governors and lawmakers with more painful choices, such as education cuts and layoffs.
"They're going to have to cut their budgets significantly," said Mark Vitner, senior economist and managing director at Wachovia.
In Massachusetts, the highest expected deficit for the 2009 budget year could be $2.4 billion, or 8.5 percent of the budget, according to figures presented to the National Conference of State Legislatures.
California lawmakers struggled to reach a deal to raise taxes, borrow money, and cut services to close a multiyear $42 billion deficit. About 1.7 million Californians are out of work, which means less income tax revenue.
