What to do when state finances turn gloomy

Homeowners and credit card consumers aren't the only ones drowning in debt. A new analysis by the Center for Budget and Policy Priorities warns that 20 states are facing a combined budget shortfall of $35 billion in 2009, and eight more are expected to have problems.

According to the study, eight out of the 12 Southern states are in the hole or heading there:

The 20 states in which revenues are expected to fall short of the amount needed to support current services in fiscal year 2009 are Alabama, Arizona, California, Florida, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nevada, New Hampshire, New Jersey, New York, Ohio, Rhode Island, South Carolina, Virginia, and Wisconsin.

Another five have said that they will have deficits that will need to be closed for fiscal year 2009, but have not released information on the size of those deficits. They are Louisiana, Michigan, Mississippi, Oklahoma, and Vermont. Analysts in three other states - Connecticut, Missouri, and Texas - are projecting budget gaps a little further down the road, in FY2010 and beyond.

What's the best way for states to fill these gaps? Unfortunately, most start slashing social services -- a dubious approach that not only hurts the most vulnerable, but also takes more money out of the economy than a tax increase does, making the economic situation even worse.

The Progressive States Network outlines the basics of a more effective strategy, based on three themes: (1) Have wealth pay their share, and cut taxes for working families; (2) Cut corporate loopholes, not social services; and (3) Prune economic development subsidies, protect social investments.