The State of the States: Broke

Here's an axiom of the new budget math for state officials: '80s into '90s won't go. For much of the past decade state budgets were pushed into the black by a buoyant economy that kept tax revenues pouring in just fast enough. In a pinch, states could unveil a new lottery, nudge up the sales tax or practice the kind of creative accounting that shifts one year's outlays into the next. But with the economy slumping and voters raising a fuss at the very whisper of new taxes, the assumptions of the '80s are not working anymore. Now 29 states are facing budget deficits. That may be business as usual in Washington, but most states are obliged by their laws to maintain a balanced budget.

The nationwide economic slowdown has deeply cut into revenues from state corporate and income taxes while also leading to cautious consumer spending that reduces the take from sales taxes. Meanwhile, outlays have been rising sharply for bridge and highway maintenance, prison construction and new schoolrooms for the second wave of the baby boom. The stiffest increases have been in health-care costs. Medicaid spending by states rose 18.4% in fiscal 1990 alone. Thus many of them are struggling with the prospect of big budget cuts and higher taxes, or drawing on reserves. "It's going to be batten down the hatches," says Ray Scheppach, executive director of the National Governors' Association. "The big question is how deep this recession is going to be."

Among those states facing the most serious problems:

CALIFORNIA is suffering the full impact of the taxpayers' revolt of the 1980s. Proposition 13, the 1978 referendum that froze property taxes at 1% of assessed value, depleted county treasuries, leaving the state to pick up the bills for things like schools and welfare services. Now California faces a $1.5 billion budget gap that is expected to swell to $6.5 billion by 1994. Incoming Governor Pete Wilson is refusing to rule out the possibility of higher taxes. But he also wants more freedom from constraints imposed by the state constitution and voter initiatives and laws that earmark much of the budget in advance for such purposes as education.

CONNECTICUT has an 8% sales tax, one of the nation's highest, which once compensated handsomely for the fact that the state had no income tax. With consumers on a buying binge, the state could afford to let spending rise 59% between 1984 and '88. Then recession hit, the shopping spree ended and sales- tax revenue was reduced to a trickle. For this fiscal year, Connecticut is looking at a $500 million shortfall, which is expected to triple in the next. That would amount to 20% of the state's projected $7.9 billion budget for fiscal 1991, proportionately the highest deficit acknowledged so far by any state. Governor-elect Lowell Weicker, who has asked all state agencies to propose budget cuts of up to 20%, is thinking of the unthinkable: an income tax.