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Not-so-happy new year to the states

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Mike Groll/AP/File

(Read caption) State workers rallied against Gov. David Paterson's furlough plan outside the Capitol in Albany, N.Y. in this early May file photo. More states are looking for ways to trim budgets.

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While the rest of us are celebrating Independence Day, most states are commemorating the beginning of their new fiscal years. Forty-six states started their budget year on July 1 and most have managed to pass their tax and spending plans on time. In many legislatures, fiscal plans were accompanied with more than the usual share of fireworks, though not the partying kind.

New York just passed its FY 2011 budget, 3 months into its fiscal year. This leaves just California without a budget after its fiscal year has begun, but like the Rose Bowl and the Gilroy Garlic Festival, that's become something of a Golden State tradition—with late budgets in 19 of the last 25 years. Michigan hasn't finished its budget either, although its fiscal year doesn't start until October. Still, it seems closer to a deal than California. Meanwhile, kudos to Pennsylvania, New Jersey, Tennessee and the rest for being on time.

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Following New Year's tradition, it's a good time to take stock. States have gone on diets, cutting spending two years running, and more than 30 have raised taxes and fees. On the positive side, newly released Census of Governments information shows that state tax revenues were up 2 ½ percent in the first quarter of calendar year 2010 compared to a year earlier. The main reason: increased personal income tax revenues. But the news wasn't all good: corporate income taxes dropped in the same quarter and growth in state and local taxes was much smaller, mainly due to property taxes falling for the first time (in year-over-year comparison) since 2003. If this continues, local government woes may expand beyond jurisdictions such as Detroit and Harrisburg, PA that have been teetering on the edge of bankruptcy.

For the states, aggregate taxes may be up since last year but they are still ten percent below where they were in the first quarter of 2008 despite having raised taxes or fees over the last couple of years. The National Council of State Legislatures estimates that states are starting the current fiscal year with an aggregate $89 billion deficit. And over half are counting on additional federal aid, mostly in the form of a yet-to-be-passed extension of extra federal Medicaid matching funds. Without the extension, these additional federal dollars will dry up at the end of December.

Unfortunately, Congress is resisting any more stimulus spending. The feds might want the states to celebrate their independence by standing on their own but the states aren't ready for that. Without the extra Medicaid funds, I'm afraid states will have a pretty grim new year.

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