Read states' lips: No new taxes in next fiscal year, hardly

For most states, new taxes are off the agenda next fiscal year, according to reports from the National Governors Association. The recovering economy will yield higher tax revenues for states, but not to pre-recession levels.

State governments are poised to boost spending in their next fiscal year for the first time since 2008, and they generally plan to do it without raising taxes.

That news, from the National Governors Association Thursday, comes as states continue to face a financial squeeze.

Tax revenues have begun to recover but remain below where they stood when the financial crisis hit. The recession has boosted demand for social welfare programs such as Medicaid. And it won't be long before emergency aid from President Obama's Recovery Act begins to fade away.

"The fiscal situation for states going into 2011 will still be worse than before the recession," Scott Pattison, executive director of the National Association of State Budget Officers, said in a press conference.

Tax collections should rise as the economy recovers, he said. "We're projecting a 3.9 percent increase" in the 2011 fiscal year, which for most states begins in July. But that still leaves about 32 states facing budget gaps that collectively total $62 billion. Those will need to be closed largely with spending cuts.

Spending a collective $22 billion more next year

Overall, the governors hope to spend $635 billion for the year collectively, up from $613 billion in the 2010 fiscal year. But it was $687 in fiscal 2008. They are seeking $3 billion in net tax hikes, down from $24 billion in 2010, according to the report.

With Recovery Act funds running out, the governors have asked Congress to approve $23 billion to help states pay for their share of the Medicaid program for poor Americans.

President Obama on Monday said a "fragile" economy warrants additional stimulus efforts, including for aid for state and local education programs.

"We have to work with state and local governments to make sure they have the resources to prevent the likely layoffs of hundreds of thousands of public school teachers across the country over the next few months," Mr. Obama said in a speech at Carnegie-Mellon University in Pittsburgh.

Public wants fiscal restraint

At the same time, in an election year and the aftermath of a recession, Obama and state governors are feeling pressure from a tax-wary electorate to show fiscal restraint.

That helps explain why tax hikes faded from the menu of options as governors introduced their 2011 budgets.

Longer term, states will confront challenges such as deferred infrastructure needs, rebuilding retiree trust funds, and replenishing so-called rainy-day funds.

Still, Mr. Pattison predicts that the fiscal problems won't result in a bond default by any states, and many outside analysts agree.

"The risk posed by the most fiscally challenged US states does not match events unfolding in the Eurozone," spawned by the Greek debt crisis, Goldman Sachs economist Alec Phillips said in a recent report.

Related:

• Schwarzenegger calls for deep California budget cuts
• Economy may be rebounding, but state budgets are still hurting
• Opinion: Best move for cash-strapped states? Raise progressive taxes.