The markets rejoiced yesterday. But the wider economic slowdown is well underway, and local governments are feeling the pinch. California — one of America’s richest states — recently asked for emergency federal funds to relieve a deficit crisis. Andrew Snyder says more states are heading in that direction. This means spending cuts and higher taxes at the worse possible time…

This from Today’s Financial News:

We have all heard about California’s woes. But how about Connecticut, Maryland, Pennsylvania, and the 25 other states expecting major deficits over the next year.

In the state where I did my undergraduate work, Pennsylvania, the problem is similar to the issues faced in most other states. Spending has been out of control for years. Tax rates have been raised as high as they can get.  Any higher and the citizens will revolt. Now governors and state congresses are in a real pickle.

In Pennsylvania, the shortfall is somewhere in the range of $800 million to $2.5 billion. Thanks to a tax-revenue decline of nearly 5% over the last quarter, or $281 million, the state is in real trouble if the economy slows any more.

There is no doubt, major spending cutbacks are on the way. A hiring freeze has already been enacted. And you can bet taxes will go up.

The timing of these nationwide state cutbacks could not be worse. When the economy takes a nosedive, America needs its local governments the most. They are expected to be the employer of last resort. They are supposed to increase welfare benefits during downturns. And they are expected to lower taxes when times get tough.

But thanks to the ineptitude of our elected officials, state governments are looking no better managed than some of the companies we have seen on the bankruptcy roles over the last few weeks.

My guess is, we will see more of both varieties looking for a bailout as this economy unravels.

I just hope the marching band gets the trumpet wax it so desperately needs.

Source: State Budget Deficits: Here Come the Tax Hikes

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