By Debra Jasper
Columbus Enquirer Bureau

COLUMBUS - Like Ohio, states across the country are raising taxes, cashing in savings accounts and debating whether to expand gambling, cut health care for the poor or eliminate other key programs to stave off financial disaster.

The situation is so bleak that total state balances have shrunk to just $14.7 billion this year - a 70 percent drop since the economic boom times of 2000.

In Ohio alone, the budget crunch has forced consumers to pay an additional 31 cents for every pack of cigarettes, to shell out 30 percent to 40 percent more for university tuition than they did four years ago and to forgo once-common tax rebates.

And, experts say, the worst is yet to come. Lawmakers here have already drained a billion-dollar rainy day fund and are searching for money to offset a budget deficit next year that could be a whopping $4 billion.

That means Ohioans should expect more tax increases and cuts in medical care for the poor and disabled in 2003. Officials are looking at all options, including higher sales taxes, adding new taxes on professional services and reducing Medicaid payments for items such as ambulance runs.

"States are finding themselves in a deeper pool of red ink than they've faced anytime since the early 1980s," says Stephen Moore, an expert in state fiscal policy at the Cato Institute, a nonprofit group in Washington that stresses fiscal restraint and tax reduction.

"Over the last six or seven years, we saw an explosion in spending by governors and legislators, and it was unsustainable," he said. "They acted like the good times were going to last forever, but the bubble burst."

States whose budgets increased 8 percent to 10 percent each year during the free-spending '90s now find themselves in deep fiscal holes, Mr. Moore said.

"This is a good time for states to tighten their belts, reassess where the fat is in their budgets and downsize like so many private companies are doing."

Most states are heeding that advice, a 2002 National Governors Association survey shows. To make ends meet this year, 26 states, including Ohio and neighboring Indiana and Kentucky, tapped rainy day funds; 15 states laid off employees, and 13 reorganized programs.

But the NGA and other national organizations predict even tougher times ahead.

In Indiana, for example, lawmakers hit with demands to spend $323 million more on education over the next two years are at the same time struggling to deal with an $800 million deficit.

Their fiscal situation would have been worse had a special session of the General Assembly not voted in June to increase cigarette and gambling taxes - contributing to a 6.2 percent rise in the state's tax collections over a year ago. Even with that increase, legislators are considering taking money from the tobacco settlement fund in the hope of balancing the budget without cutting prescription drug subsidies or other popular programs.

Bill Sheldrake, president of the nonpartisan Indiana Fiscal Policy Institute, said the sluggish economy hit Indiana hard because 80,000 people lost their manufacturing jobs in the past two years and needed unemployment benefits and other social services. That meant tax collections went down at the same time costs went up.

Kentucky officials face similar problems. Budget problems prompted the governor to release more than 500 nonviolent prisoners this month to avoid paying for their incarceration.

In addition, Kentucky lawmakers are discussing raising taxes on tobacco - a rare move in a state that leads the nation in smoking and where tobacco is a $1 billion cash crop grown in 119 of 120 counties.

Legislators also are considering legalizing gambling at racetracks or allowing full-blown casinos.

Lawmakers already have cut $463.8 million from the budget in the past three years and used $680 million in rainy-day funds.

Now Gov. Paul Patton says the state must bring in more money or cut $509 million over the next two years.

Raymond Scheppach, executive director of the National Governors Association, says states are considering drastic measures because they are experiencing the worst budget crises since World War II.

"You've got a $50 billion shortfall (of all states combined) this year and some of the estimates for next year are $60 to $70 billion," Mr. Scheppach said.

He blamed the fiscal crisis not on overspending by legislators and governors but on an explosion in health care costs, antiquated state tax systems and a sour economy.

States pay about 40 percent of the costs of Medicaid, the federal health care program for the poor, and costs are soaring as much as 13 percent a year. Health care for state employees is also skyrocketing.

"No matter what a state does, it will continue to get killed by Medicaid," Mr. Scheppach said. "It's across the board."

Meanwhile, states continue to rely on a tax system designed in a manufacturing economy, even though most states now have a service economy, Mr. Scheppach said.

"We're a borderless economy in this high-tech world. No longer is it about individuals going to their small town stores and buying something and getting taxed," he said. "In cyberspace, where does the tax take place? Tax revenues just aren't keeping up."

Mr. Scheppach said expanding gambling and using tobacco money to bolster budgets are short-term fixes, but over the long run states will have to consolidate agencies, reform tax systems and cut back spending.

He predicts states also will turn more of the responsibility for delivering services over to private companies.

Arturo Perez, an expert in the fiscal affairs program for the National Council of State Legislatures, agrees the toughest decisions will come in 2003 and 2004.

"All the low-hanging fruit has been picked, meaning that the easy one-time fixes that were implemented this past year won't be available," he said.

He predicted states will have to start looking at taxing services provided by attorneys, accountants and computer and investment experts to raise more funds. They also will work to find a way to tax Internet purchases.

"Things are about to come home to roost in many states," he said. "They had hoped the economy would start moving and they would see positive (tax) numbers but that's not happening."

If the economy continues to falter, Mr. Moore said states such as Ohio that spent their rainy day funds in 2002 will be particularly hard hit because they won't have that money to fall back on next year. In addition, he said states with rapidly growing budgets will find themselves in a serious fix.

Among the 10 largest states, only Ohio and New Jersey have budgeted spending increases higher than five percent in 2003. Many states, such as California and New York, are planning to spend less than they did in the current fiscal year.

"I believe Ohio is an example of a state that hasn't gotten the message that it's time for shrinking the budget, not expanding it," Mr. Moore said. "Ohio is unusual in calling for enormous increases in spending at a time when a fiscal crisis is upon them."

Tom Johnson, the state budget director, defends the state's spending plan, saying it is difficult to make "apples-to-apples" comparisons between states because some, such as Ohio, include more in their general revenue fund than others. In addition, he said, in some areas of spending the state has no choice.

"Two items are driving the increases," he said. "Medicaid, because it's an entitlement program, and education, because it's a top priority and also because it is the subject of a court case."

Prompted by an Ohio Supreme Court decision that found Ohio's school-funding system to be unfair to poor schools, the state has spent nearly $2 billion in the last four years on school construction and repairs.

Gov. Bob Taft campaigned on his administration's record spending increases on primary and secondary education and promised to increase spending this year on higher education. But the governor acknowledges other areas of the budget could be hit hard.

The 2003 fiscal year, he said, "is going to be very painful."

E-mail djasper@enquirer.com