The street lights may still be twinkling on Sunset Boulevard and the sun may still come up every morning over the Mojave desert, but California could soon be plunged into fiscal darkness.

Matthew Ces, 7, watches his mother Joan Ces, both of Alise Viejo, Calif., peer in the window of the closed Henry Whitfield State Museum, Tuesday, June 17, 2003, in Guilford, Conn. This 1639 structure, a stop in their guidebook's list of New England's best driving tours, has been off-limits to visitors since Gov. John G. Rowland laid off staff in January to help balance the state budget. Signs posted on the doors explain that the house and three other state historical sites are in danger of being permanently closed if funding is cut in the next budget. (AP Photo/Jennifer Page)

The state with an economy the equivalent of the world's fifth largest nation is bust, and a crisis which could lead to mass lay-offs and collapse of the public education system is in the offing.

California is just one of many states facing the worst financial crisis for decades.

Nevada, smarting from a decline in tourism and a loss of gambling revenues to the growing number of reservation casinos, is facing a deficit of up to $1bn.

To deal with the shortfall, it is introducing a novel live entertainment tax of 10%, which will apply to the state's brothels, legal in 10 of Nevada's 17 counties. The state's many strip clubs would also have to pay the tax.

Elsewhere, New York's police officers are leading the drive to plug a potential $4bn deficit in the city's budget, fining anyone they can for anything they can think of.

One man was ticketed for sitting on a milk crate outside a shop; the citation was "unauthorized use of a crate".

Alabama has been facing a deficit of $700m and now the governor, Bob Riley, a conservative Republican, has announced the biggest tax changes for 100 years.

"We cannot balance our budget with cuts alone, not unless we are willing to lay off thousands of teachers and cancel all extra-curricular activities, open prison doors and put convicted felons back on the streets, and force thousands of seniors out of nursing homes and take away their prescription drugs," he said.

There are also budget crises in Oregon, Connecticut, New Hampshire and Rhode Island.

In Connecticut, the Republican governor, John Rowland, is now running the state by executive order, making ad hoc decisions on which of the state's mounting bills get paid until a budget is agreed.

Actor Tim Robbins speaks at the Actors Gang Theater in Hollywood at a news conference June 23, 2003 speaking against the impending 73% budget slash for all publicly-funded arts programs in California. The reductions will be voted on by the California legislature and ultimately signed by the Governor Gray Davis. Robbins urged Davis to reconsider the drastic cuts to the California Arts Council's programs. REUTERS/Fred Prouser

But it is in California that the meltdown is most spectacular. The state has a deficit of $32bn and desperately needs to agree a new budget. The Democrats, who control both the state senate and assembly, want to put half a cent on the sales tax and make some cuts in public services.

The Republicans, whose support they need to pass the budget with the required two-thirds majority, have suggested an alternative which would mean mass lay-offs of public employees, closure of college courses, and putting back by a year the age for entering kindergarten.

Into this stew has been added a spicy political ingredient. Democrats believe the Republicans are being encouraged by the White House to cause chaos in the hope this will lead to the recall of the Democratic party governor, Gray Davis, and his replacement with a Republican, possibly Arnold Schwarzenegger.

Mr Davis is fighting his corner. "I will not sign a budget that slams the door on more than 100,000 kindergarten students," he said this week.

The Democrats have warned that if the Republican budget were adopted, with its cuts in prison costs, it would mean freeing 20,000 prisoners.

California has the lowest credit rate of any state, but others are facing problems of varying magnitude.

The stuttering economy is blamed for the chaos as taxes once generated by capital gains and stock options in the wealthier states in the boom years have dwindled.

Growing unemployment, which reached a national nine-year high of 6.4% in June, means people are buying less, thus cutting sales tax revenues. And most states have used up their "rainy day" funds over the past two years.

© Guardian Newspapers Limited 2003

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