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States weigh tax hike over budget cuts

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Renita Jablonski: A lot of people are facing hard choices right now when it comes to what to spend money on. States are tightening their fiscal belts as they grapple with the nation's economic slowdown. As Danielle Karson reports, governments are making a lot of hard choices, too.


Danielle Karson: More than two dozen states are in the red because of soaring gas and food prices and a tanking housing market. It's wreaking havoc on the economy's biggest engine -- consumer spending. And that's draining state coffers of precious income and sales tax revenue.

Jared Bernstein: There's only a few choices states have at a time like this, and their goal is to choose the one that does the least harm.

Jared Bernstein is an economist with the Economic Policy Institute. He says states can shrink their budget deficits by cutting spending, dipping into reserves, or:

Bernstein: Raising taxes is probably the least worst thing you could do. And if you structure your tax increases so that they don't tend to hit folks in, say, the bottom half or two thirds of the income scale, that's the right way to do it.

Deficits are a bigger problem for states. Unlike the federal government, states are required to balance their budgets, and they'll do whatever it takes to stay in the black.

California, Massachusetts and New Hampshire are considering tax hikes. Maryland, New York and Michigan have gone ahead and raised taxes. Maryland, for example, bumped up the tax rate for people in the upper income brackets, and also increased the sales and corporate income taxes.

State Treasurer Nancy Kopp:

Nancy Kopp: No one likes to have their taxes increase -- none of us do. But it was that, or cut radically into schools, funding for libraries and health.

According to a study by the Center on Budget and Policy Priorities, states are mostly relying on spending cuts to patch their budget holes. Co-author Iris Lav says health care and education are taking the biggest hits.

Iris Lav: We have 14 states cutting funding for higher education, which means that's gonna prevent middle-income people from access to higher education as the tuition goes up to make up for those cuts.

Lav says the fiscal crisis has yet to bottom out, and that could mean another round of spending cuts if states' budget coffers keep shrinking. But experts say don't expect tax hikes -- at least until after the November election.

In Washington, I'm Danielle Karson for Marketplace.

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