State Budget Deficits a Drag on U.S., Economists Say

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Byline: Siobhan Hughes Bloomberg News

WASHINGTON - The biggest U.S. state budget shortfalls since World War II are forcing legislatures to raise taxes and cut spending, threatening to cancel out the benefits of the Bush administration's economic stimulus plan, economists said.

California is facing a record deficit of $34.6 billion; New York, $11.5 billion; and Texas, $9.9 billion over the next two years. Governors are firing workers, cutting back aid to schools and cities and raising fees and taxes. Such steps will probably total $80 billion to $100 billion, creating a drag on the economy about the same size as the boost that President George W. Bush wants to provide by cutting federal taxes, economists said.

``We're set for a really negative impact on the U.S. economy,'' said Joseph Stiglitz, a Columbia University professor and a Nobel-prize winning economist. ``The states and localities are facing massive shortfalls.''

The budget deficits are occurring because revenue from personal, corporate and other taxes have dropped.

Oregon state economists recently forecast that Oregon will collect $244.5 million less in tax receipts than projected in December for the rest of the year.

National unemployment is close to an eight-year high of 6 percent, and the Standard & Poor's 500 Index has dropped three straight years, bringing the index down by almost half since March 2000. States also are contending with rising costs for Medicaid, double-digit health insurance increases, and new federal requirements for spending on homeland security and education.

The shortfalls themselves place additional pressure on budgets because of credit downgrades. A rating cut last month by Moody's Investors Service left California's borrowing costs $4.8 million a year higher for each $1 billion in debt than a top rating would allow. …