MOUNT JULIET, Tenn. — As 46 states start their budget year today, they are battling their worst financial crisis in a decade. The sour economy prompted a decline in tax revenue and left most states scrambling to close budget shortfalls with a combination of tax hike and spending cuts.

        But nowhere has the situation looked as grim as in Tennessee. The state needs about $870 million in new tax revenue to maintain spending at the same level as last year.

        At Stone Creek Elementary School, in this Nashville suburb, that budget shortfall would translate into cuts so deep the school would have to lay off a fifth of its teachers, the assistant principal, the library aide and all teaching assistants. That was just to start.

        “It gave me a headache to even think about it,” principal Phyllis Robinson says. “We're used to having some cuts but nothing to this extent.”

        But the Tennessee Legislature averted financial disaster over the weekend, with an 11th-hour plan to keep essential government services running through Friday. The plan would furlough 22,000 of the state's 42,000 employees while lawmakers try to solve the budget problem.

        The scramble here to make ends meet has been repeated in almost every statehouse from California to Maine.

        Forty states and the District of Columbia faced money shortfalls that forced $27 billion in emergency budget cuts this year and layoffs in seven states. Missouri was so short of cash in April that it suspended paying income tax refunds for a few weeks.

        “The only good thing you can say about fiscal year 2002 is that it is ending,” says Aturo Perez, a fiscal analyst for the National Conference of State Legislators. “At the same time, states are not entering the new year with any encouraging news.”

        States' finances are more precarious than during the recession of 1991. As the economy recovered and soared in the 1990s, state lawmakers cut taxes. This shrank the tax base and left states ill-equipped to pay the bills when the boom busted and tax revenues dropped.

        “The problem is, as the situation continues to deteriorate, what do they do?” says Raymond Scheppach, executive director of the National Governor's Association. “It's education on the chopping block or more broad-based tax increases.”

        Despite the crisis, lawmakers are reluctant to raise taxes in an election year. Governorships in 36 states are on the November ballot, along with numerous legislators.

        In Tennessee, where the primary election is Aug. 1, both the leading Democrat and Republican candidates for governor took pledges of no new taxes, even in the face of draconian cutbacks.

        Proposed budget cuts include laying off 6,400 state employees and 8,000 school employees, plus shortening the school year, raising college tuition and limiting enrollment. Some state parks would close. State-funded health insurance would be eliminated for 200,000 Tennesseans. And departments that promote tourism and development would be axed.

        The candidates' vows brought the debate over tax increases to a standstill for weeks. Lawmakers were so angered, one senator publicly dubbed the gubernatorial contenders “those two idiots.” Several legislators suggested in speeches that they simply adjourn and leave the mess to the winner after the November election.

        Other states were equally skittish about raising taxes, with a few exceptions. A week ago, Indiana approved a sweeping tax increase after facing severe cuts in services.

        Elsewhere, at least 30 states raised cigarette taxes. At least 22 states bought time by tapping “rainy day” funds socked away in the 1990s.

        Many states also have resorted to creative accounting. North Carolina, for example, borrowed $150 million from its $300 million Hurricane Floyd relief fund to make up for a shortfall. Wisconsin and a handful of other states borrowed from their tobacco litigation settlement money. Minnesota closed its budget gap by delaying state aid to schools for a few weeks — until the new fiscal year.

        “Those are one-time shots,” says Nicholas Jenny, an analyst at the Nelson A. Rockefeller Institute of Government in New York.

        The recession hit the 41 states with an income tax the hardest. Since the economy weakened last year, nearly 2 million jobs have been lost nationally. Consequently, income tax collections dropped. As the stock market slumped, so did capital gains taxes paid on profits from selling stock.

        The situation in California is dire. A few years ago, California was thriving on tax collections from high-rolling investors and tech workers. Today, Gov. Gray Davis, a Democrat, is trying to close a $23.6 billion budget gap — a third of the state budget — by increasing taxes on vehicles and cigarettes and cutting welfare and health services.

        Tennessee's budget problems are unique. When the recession hit, Tennessee was already in trouble. It had cut its state budget for four years.

        Part of the problem was brought on by expensive state programs that reduced classroom size and expanded the Medicaid program, known as TennCare, to provide better services to more people.

        But even without those programs, Tennessee was in trouble because it relies primarily on a sales tax that doesn't bring in enough money to run government.

        “The revenue growth is too slow to fund government in Tennessee,” says Bill Fox, director of the University of Tennessee's Center for Business and Economic Research.

        Efforts to overhaul Tennessee's tax structure, including adding an income tax, stalled for years. Anti-tax protesters, led by two radio talk-show hosts, stormed the state Capitol last year and broke a window. The protesters returned again this spring, although in smaller numbers.

        But supporters of a tax increase say Tennessee has no other options unless it drastically cuts programs.

        “They've used just about every trick they've got,” says Linda McCarty, executive director of the Tennessee State Employees Association. “We've already had the fudge-it budget. Last year, we used all our tobacco money. Our rainy day fund is down to $5 million. It's been like cutting a dog's tail off a little bit at a time.”

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