States' Sorry State Will Pinch Tax Breaks

The checks are in the mail, but don't count your tax breaks before your state's plans are hatched.

This Friday, July 25, the Treasury will begin mailing checks to taxpayers who claimed the child tax credit for 2002. (The checks are an advance payment of the increased portion of the child tax credit for 2003.) Similarly, by now, most companies have adjusted the withholding amounts from your paycheck.

You're feeling richer already, I bet.

Sadly, though, that feeling is likely to be short-lived. Economists and tax analysts have long fretted that any benefit from federal tax breaks will be swallowed by the gaping maw of state budgetary woes. And now that states have finished their fiscal year as of June 30, the budgetary numbers certainly back that theory.

Unlike the federal government, states are required to balance their budgets (with the sole exception of Vermont). That means revenue must at least equal expenditures. And the fastest way to make that happen in times of dire straits? You guessed it: Raise taxes.

Now, state governments have done a remarkable job of avoiding raising income taxes. In fiscal 2003, 37 states were forced to reduce their already-enacted budgets by nearly $14.5 billion, according to the National Association of State Budget Officers (NASBO). That's the largest spending cut in the history of the association's 27-year-old fiscal survey.

In the early days of the recession, states initially attempted a "nip and tuck" approach to cutting their budgets. But in the year that ended June 30, 28 states used across-the-board cuts, 22 states spent the reserve funds they had built up in the heady days of the late 1990s, 17 states laid off employees, and 10 reorganized agencies and programs.

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