10 States With the Largest Budget Shortfalls

Illinois Gov. Patrick Quinn approved tax increases to fight the red ink.

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The federal deficit was a major talking point in the 2010 elections, with Republican candidates in particular touting the virtues of "fiscal responsibility" and the need for cutting spending. Indeed, the federal deficit has grown at breakneck pace: since the surpluses of the late 1990s and early 2000s, the deficit has swollen considerably, exceeding $1 trillion every year since fiscal year 2009. Yet despite receiving less national attention, state budget deficits are also creating precarious fiscal situations nationwide. Falling tax revenue and the end of federal Recovery Act assistance may make the coming fiscal year the most difficult yet for many U.S. states. In Illinois, which is facing some of the worst fiscal troubles in the nation, Democratic Gov. Patrick Quinn on Thursday approved tax hikes to fight the red ink, increasing personal income tax rates from 3 to 5 percent, and business income taxes from 7.3 to 9.5 percent.

Before they pass budgets, states project their revenues and outlays for the coming fiscal year. Every state except Vermont has a balanced budget law in one form or another, so legislators must close any gap between revenues and outlays before they can pass a formal budget. Cumulatively, those state budget gaps have grown to staggering levels during the current recession. Fiscal year 2010 saw the largest state deficit total ever, with $191 billion. Such figures tower over state deficit figures from previous recession years. During the recession of the early 2000s, the largest cumulative state budget deficit was $80 billion, in 2004. According to a recent report from the Center for Budget and Policy Priorities, the total deficit projection for the current fiscal year is $160 billion. In FY 2012, which in most states will begin on July 1, 2011, that projection is slightly lower, at $140 billion. However, federal stimulus funds, which offset more than one-third of total budget shortfalls in 2010 and 2011, will run out in 2012, leaving states to handle their sizable budget gaps largely alone.

Phil Oliff, a policy analyst at the Center for Budget and Policy Priorities, says that states will have to undertake a number of measures to bring their budgets out of the red. "States are facing a very significant fiscal problem," he says. "The problem states are facing is really too big for any single solution." Those solutions include tactics like raising taxes, cutting spending, and drawing on reserves—all of which are potentially risky and could further threaten recovery.

Below are the 10 states that are projecting the largest shortfalls for FY 2012.

State Projected FY 2012 shortfall
(in millions of dollars)
California $21,300
Illinois 17,000
New Jersey 10,500
Texas 10,000
New York 8,200
Connecticut 3,800
Minnesota 3,800
North Carolina 3,000
Ohio 3,000
Florida (tie) 2,500
Oregon (tie) 2,500

When viewed as a percentage of the full state budget, the task of closing these budget gaps can appear even more daunting. In Illinois, for example, the $17 billion 2012 shortfall is more than half the size of the 2011 state budget. Altogether, 40 states project shortfalls for their 2012 budgets, with a total that equals 19 percent—nearly one-fifth—of their 2011 budgets. Below are the ten states with the largest projected 2012 shortfalls, relative to their most recent budgets.

State Projected FY 2012 shortfall
(in millions of dollars)
Shortfall as Percentage
of FY 2011 Budget
Illinois $17,000 52.3
New Jersey 10,500 37.5
Nevada 1,300 36.7
Mississippi 1,200 27.6
South Carolina 1,300 26.1
California 21,300 25.7
Minnesota 3,800 25
Texas 10,000 22.3
Connecticut 3,800 21.6
Louisiana 1,700 21.2