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States' coffers are feeling a pinch

Housing bust and falling sales-tax revenues remind some officials of the period before 2001 recession.

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Florida is working in special legislative session to cut property taxes as a way to stimulate consumer spending.

Nevada has called for a 5 percent cut in the budgets of all state agencies.

Michigan has expanded its sales tax to cover luxury services such as massages, manicures, and skiing, which were not taxed previously, and has increased the income-tax rate from 3.9 percent to 4.35 percent.

With at least a quarter of US states collecting less money than anticipated from sales taxes, and many others barely holding even with inflation in their overall revenues, state budgets appear to be headed for tough times, say several economists. Closing the gap may require states to use creative measures, these same economists predict. With a falling housing market, several experts see troubling economic warnings similar to those that preceded the US recession in 2001.

This time, they say, states would probably be on shakier ground because they won't have the years of fat that the 1990s stock-market boom provided.

"Many of the indicators, from sales-tax receipts to national debt to purchase of US treasury bonds, are similar to the year 2000," says Philippa Dunne, a co-editor of The Liscio Report on the economy. "But this time, states may have to take more drastic measures because they won't be coming out of a decade in which they had tons of money."

Why housing market downturn is key sign

The receding housing boom is affecting nearly every state and is a key indicator, say Ms. Dunne and others, because it produces a domino effect, colliding with the consumer purchases that feed state treasuries via sales taxes. On average, about one-third of state income comes from sales taxes on consumer items.

"When people are not buying homes, they are not buying appliances and furniture and other big-ticket items to go inside them," says Robert Ward of the Rockefeller Institute of Government in Albany, N.Y.

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