State governments in recent years have faced some of the darkest financial times since the Great Depression and a new report raises concerns that they may not end soon.

The CBPP's solution to the crisis is scaling back federal taxes cuts and using those funds to shore up support for state governments.

A study released this week by the Center on Budget and Policy Priorities, a Washington-based think tank that focuses on issues affecting moderate- to low-income families, said preliminary estimates show shortfalls in fiscal 2005 could total $40 billion -- less than this year's $78 billion but still a major concern.

State governments have closed a cumulative budget gap approaching $200 billion over the last three years, brought on largely declining revenues and tough economic times, although some critics like CBPP place part of the blame on federal policies.

Nick Johnson, director of the center's State Fiscal Project, said Friday the projected budget shortfalls are "likely to lead to increased pressure for spending cuts and tax increases." This would come on top of those spending cuts and tax hikes already enacted.

State legislatures will be meeting early next year in most states to address their budgets in fiscal 2005, which begin July 1, 2004, in all but four states. The report said the shortfall numbers could climb before all the states complete collecting revenue data.

California, Florida, Georgia, Illinois, New Jersey, New York, North Carolina, and Virginia face major shortfalls, the report states. In 21 states where preliminary estimates were obtained, shortfalls totaled $32 billion to $33 billion. This could increase to $40 billion as more states issue estimates in the next few months, according to the report.

In California, where Republican Gov.-elect Arnold Schwarzenegger is facing a fiscal crisis, there is a projected $8 billion deficit in fiscal 2005. Florida is looking at $1.3 billion; Illinois, $3.2 billion; New Jersey, $4 billion, and New York, $5.7 billion, the report states.

These estimates do not include shortfalls that may develop during the current fiscal year if current revenue estimates fail to keep up with projections. Some states are already reporting revenues flows that will fail to keep fiscal 2004 budgets balanced.

The National Conference of States Legislatures, which provides budget research for state legislators, will not take a look at fiscal 2005 budgets until the spring of 2004 when more data is available, NCSL budget analyst Arturo Perez said Friday from Denver.

Perez, who was cautious about fiscal 2005, said state budget officials are concerned about the next fiscal year because of the "rather lackluster performance" of the U.S. economy to date, which has extended beyond what most economists expected.

"This had led to considerable concern among state officials regarding what they can or should anticipate in revenues and budget figures," he said.

Johnson said many states have exhausted "short-term" solutions like drawing down rainy-day funds. Rainy-day balances have fallen from a record $25.9 billion in fiscal 2000 to a projected $8 billion in fiscal 2004, according to the NCSL.

"The only alternative to even more deeper, painful spending cuts is revenue increases," he said.

The CBPP said states have closed budget gaps more by cutting spending than by raising taxes during the current fiscal crisis. Average real per-capita state spending in 2004 will be 2 percent lower than it was in 2003, according to the report.

Public health spending and education took some of the heaviest hits in current state budgets. About 18 states slashed eligibility for public health insurance and 11 states cut K-12 education in fiscal 2004. Cuts in higher education spending also led to double-digit tuition hikes at some colleges.

Declining state revenues have been the underlying cause for state budget woes in recent years. Collections during fiscal 2003 were about $21.6 billion less than for the previous 12-month period, according to the U.S. Census Bureau.

"It's principally a revenue problem, mostly attributable to the recession, but the federal government deserves some of the blame too," said Johnson.

Federal policies have reduced state revenues at the same time they have added costs, according to the CBPP's report. The decisions have cost states and local governments about $185 billion during the four-year fiscal crisis, according to the center's research.

The report blames the bans against states taxing access fees to the Internet as well as online purchases. Unfunded mandates for homeland security and education are also noted as well as shifts over the past decade of low-income patients from Medicare to Medicaid, which is partially funded by the states.

The CBPP's solution to the crisis is scaling back federal taxes cuts and using those funds to shore up support for state governments. "Otherwise, the low- and middle-income families that are subject to state tax increases and service cuts will, in essence, be paying for the very generous federal tax cuts for the highest-income Americans," it said.

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