State Revenue Drops 31% As Spending Rises

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NEW YORK (MainStreet) — In the lead-up to the new Congress taking office this week, much attention was given to the need to reduce the national deficit, even while state budgets may actually be the bigger concern.

Total revenue for all state governments declined by nearly a third in 2009 from the year before, dropping to $1.1 trillion from $1.6 trillion in 2008, according to new data from the U.S. Census Bureau. Meanwhile, state spending actually increased by 3% in 2009, which looks like a recipe for fiscal disaster.

This decline in state funds was primarily due to a “substantial decrease” in revenue from pension funds and unemployment funds. Moreover, the total revenue that state governments collected from taxes declined 8.5% last year to $715 billion, presumably due to falling incomes as more Americans were out of work.

State governments couldn’t seem to catch a break last year as even lottery ticket sales declined slightly from the year before.

Unfortunately, the catch-22 is that state revenues declined because the recession shattered many businesses and households, but this also required states to spend more money they didn’t actually have in order to help support the increasing number of residents who had lost their homes and businesses. According to the Census, most of the increase in spending went toward education, welfare and hospitals.

To help balance this need, the federal government stepped in to lend a helping hand. Federal assistance to states increased by 12.9% in 2009, with the majority of that funding going toward state welfare programs.

The census data highlight the serious budget shortfall that the vast majority of states are staring down right now. According to the Center on Budget and Policy Priorities, the total budget gap for all 50 states going into the 2011 fiscal year was $130 billion, and for 46 states, the gap represented a full 20% of their overall budget.

So while the end of 2010 showed promising signs that consumers would be spending again, the same cannot be said for state governments if they don’t want to run out of money.

For some of the extreme ways that states have attempted to balance their finances, check out MainStreet’s roundup of the most budget-strapped states.

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