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States Balance Budgets With Drastic Service Cuts

Many states have announced higher-than-expected tax revenues lately, the first upbeat news to come out of beleaguered state budget offices since 2007. But the windfall is largely the result of smoke and mirrors. Revenue estimates for this year were set at ultra low levels, leaving plenty of room for good news.

The reality is that state budget problems are the worst they’ve been since the start of the recession. State tax revenues are more than 10 percent below their 2008 levels, and 44 states and Washington DC have been scrambling to close a collective $112 billion budget shortfall for fiscal year 2012, which for most states begins July 1.

The budget gap is dwarfed by last year’s $191 billion shortfall, but this is the first year since 2008 that states have to balance their budgets without federal aid. Stimulus under the American Recovery and Reinvestment Act, which pumped $137 billion into state budgets over the past three years, has essentially dried up for 2012. “Many one-time maneuvers to generate cash or delay expenditures have been used, so the budget gaps that have to be filled are now very real numbers,” says Harley Duncan, KPMG’s leader for state and local tax.

For taxpayers – already weary of rising taxes and cuts to critical services – the fiscal noose is tightening sharply as states resort almost entirely to deep spending cuts and tax hikes to balance their budgets.

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