Southeastern States Facing Budget Deficits Due to Reduced Sales Tax Revenues Hope Stimulus Checks Spur Consumer Spending

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States across the southeast have been forced to make budget cuts, due to lower than expected sales tax collection figures. Aaron C. Giles, a sales and use tax consultant, said "In the short term, these states may not receive the relief on which many of them are counting, particularly from increased spending as a result of the federal economic stimulus checks."

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The difference between this economic downturn and the one in 2001-2002 is that the current downturn has had its most profound effect on housing and durable goods, not stocks and investments as in the prior downturn.

Alabama, Florida, Georgia, Kentucky, South Carolina and Tennessee hope that the recent economic stimulus checks help spur consumer spending and increase sales tax revenues. "The slowdown in the housing market and recession fears have resulted in reduced sales tax collections in each of these states," said Aaron C. Giles, a sales and use tax expert at SalesAndUseTax.com. "States are hoping that the $100 billion in stimulus checks from the federal government will help bring buyers back into the market and increase revenue collected from sales tax," Giles said.

In recent months these states have faced significant budget cuts to balance the budget and avoid depleting their cash reserves. In March, Florida began slashing over $500 million from the budget, with the largest reduction coming in education. These cuts have hit colleges and universities the hardest, eliminating faculty, staff and reducing student enrollment. As of mid-June, year-to-date Florida sales tax collections were down over $900 million from 2007 levels. "People and corporations are not spending, which means less sales tax revenue," said Giles.

Georgia has had to dip into their reserves for $600 million to balance fiscal year 2008's budget, which ended on June 30th. Georgia sales tax collected in fiscal year 2008, was down 2.3% or $133 million from 2007.

Kentucky has cut $434 million from this year's budget and currently projects a $525 million deficit for 2009. Kentucky sales tax collections were down 1.3% between 2006 and 2007. While 2008 year-to-date figures have not been released, estimates are for a larger decrease year-over-year than in 2007 because of continued economic weakening. Like Florida, the largest cuts have come from education programs, with the University of Kentucky taking the largest hit. The University has responded by cutting benefits for faculty and staff, enacting hiring freezes and considering tuition increases.

Tennessee faces a $585 million budget cut and will reduce more than 2,000 jobs from the state government despite increased Tennessee sales tax revenues of 4.8% year-over-year. "Tennessee is one of the very few states that have actually seen an increase in their sales tax revenue base over the last year," said Giles.

While their budget shortfalls do not compare to Florida, Georgia, Kentucky and Tennessee, problems do exist in both South Carolina and Alabama. South Carolina needs to cut $140 million from the 2009 budget. This comes on the heels of a $100 million shortfall in 2007. A proposed bill that would increase the South Carolina sales tax rate by 1% currently sits in the State House Committee on Ways and Means. "With the budget shortfalls these states are facing, I would not be surprised to see others consider raising their state-wide sales tax rates," Giles said.

Alabama has announced over $75 million in budget cuts for the current year due to decreased Alabama sales tax revenues. "The common denominator in all of these states' budget cuts is the reduced sales tax collections," said Giles.

According to Giles, "The difference between this economic downturn and the one in 2001-2002 is that the current downturn has had its most profound effect on housing and durable goods, not stocks and investments as in the prior downturn." The downturn has affected both individuals and corporations. "On the corporate front," Giles said, "companies are cutting costs and trying to squeeze out profits, so they are not entering into the same amount of capital intensive projects they were several years ago."

Many states are hoping that the economic stimulus checks help spur in-state sales. Polls show that people plan to use the stimulus checks for vacations and electronics, such as flat screen televisions and iPhones. "If people opt for taking a vacation with this money," said Giles, "these states are not going to see the uptick in sales tax collections for which they are hoping as citizens may be spending that money in other places like Disney World or Las Vegas. States that are pinning their hopes to this increased spending may be disappointed."

Additionally, Giles points out that "A large portion of state sales tax revenue is collected from corporations, not individuals. Until businesses open their checkbooks again and the economy is expanding, states will likely not find the relief they need from these budget woes."

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