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States' bottom line improves, but can the good news last?

States' 2011 budgets are heading in the right direction as tax revenue increases, new indicators report. But with federal support waning and local demand on programs like Medicaid up, will the good news last?

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This year, many states are receiving their first bit of good economic news since the beginning of the recession. More than half of them will take in more revenue than they expected, and a handful are reporting surpluses, according to one study. Several other reports point to the same trend: states' 2011 budgets heading in the right direction as tax collections increase.

Yet the reports come with a distinct "however." Stock market volatility could hit hardest those most responsible for rising tax revenues – corporations and the rich – and some states used budget-balancing gimmicks last year that they can't use again.

Moreover, states appear to be caught in the middle, with the federal government cutting the spending and stimulus that bolster state coffers, even as the rolls for caseload-driven programs like Medicaid are increasing. Adding to that pressure, localities will be looking to states for help as property taxes lag.

"Bottom line: State revenues are improving, but not enough to meet budget demands," says Corina Eckl, head of the fiscal affairs program of the National Conference of State Legislatures (NCSL). "It's like getting a 5 percent raise but finding out that your rent went up by 10 percent."

Still, any good news is welcome news for states.

•Tax collections exceeded expectations in at least 28 states, reports the Center on Budget and Policy Priorities (CBPP). In 23 states, the primary reason was "gains in income tax collections – a result of rapid increases in the incomes of wealthy individuals and corporations over the last year," a July 11 study states.

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