State pols can't rescind recession.

• Author: Mooneyham, Scott
• Position: CAPITALGOODS

As 2009 ends, economists forecast a mostly jobless recovery. That's bad news for people out of work. It's also not so good for anyone who pays taxes, drives on roads or sends their kids to public schools. State government's revenue flow will keep trickling, even if consumer confidence and spending begin ticking upward.

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The doom-and-gloom forecast is simple arithmetic. Personal-income-tax collections make up about 55% of North Carolina's general operating revenue. When unemployment rolls grow, as they did in 2009, the largest part of the state's income stream ebbs. The decline last fiscal year was precipitous, as personal-income tax collections fell $1.4 billion--about 13%--compared with the previous year.

State legislators responded by raising taxes $1 billion, closing prisons and laying off teachers. Could more of the same be in store this year? Economists who watch state government believe it's possible. Corina Eckl, who heads the state-finances section at the National Conference of State Legislatures, says recovery of state governments almost always lags that of the larger economy.

What happened in the last recession, in 2001, backs her up. The economy contracted for eight months, with the recession ending in November. State governments, though, faced their largest budget gaps in 2003 and 2004, and real recovery for budget coffers didn't happen until 2005. Eckl predicts that states will face gaps--where budgeted needs exceed revenue--for at least 12 months after this recession ends.

Many economists believe it has ended, citing rises in U.S. exports and business-equipment purchases. If the recovery holds, increasing business activity should translate into higher consumer confidence and more consumer spending. That will mean another big part of the state's revenue flow--sales taxes--should improve. Last year, sales-tax collections dropped about $300 million--about 6%. In the first four months of the current fiscal year, they've continued to fall. "Is there any sign of recovery? Not yet, not here in North Carolina," says Barry Boardman, chief economist for the General Assembly.

Even assuming that sales-tax collections pick up soon, they represent just 25% of the state's general operating revenue. Real recovery for state government's bottom line will mean jobs and the payroll taxes that they provide. Boardman notes one good sign--temporary employment is on the rise. Still, most economists believe that employment isn't...