At start of fiscal year states close gaps of $121 billion

WASHINGTON (Reuters) - At least 46 states had to close shortfalls in budgets for their current fiscal year that totaled $121 billion, in a sign that the economic recession that began in 2007 continues to batter local economies, a think tank said on Thursday.

The Center on Budget and Policy Priorities said the recession has caused the steepest decline in state tax receipts on record.

"As a result, even after making very deep spending cuts over the last two years, states continue to face large budget gaps," it said.

All states except Vermont must end the fiscal year with their budgets balanced, which has led them to cut deeply into spending programs and also raise taxes. The federal economic stimulus plan passed in 2009 transferred more than $100 billion to states, allowing them to limit cuts in areas such as healthcare and education.

But the stimulus ends in less than six months and only about $40 billion remains to help states finish out fiscal 2011, which for most began on July 1, said CBPP.

"So even though the (fiscal) 2011 budget gaps may well be larger than those for (fiscal) 2010, there will be less federal money available to close them," CBPP said. "States are likely to respond with spending cuts and tax increases even larger than those that have already been enacted."

For fiscal 2011 and 2012, states will have to close budget gaps totaling $260 billion, according to projections by CBPP, which closely tracks state economies.

"When all is said and done, states will have closed shortfalls of more than $500 billion since the start of the recession," it said.

On a conference call with reporters earlier on Thursday, White House Chair of the Council of Economic Advisers Christina Romer said state budget shortfalls will be about 1 percent of the country's gross domestic product.

Noting that the entire $862 billion stimulus plan was equal to 6 percent of GDP, Romer said state economies provide one of the mightiest headwinds to the country's wobbling recovery.

CBPP said almost every state in the union has had to cut spending to deal with budget gaps, and over 30 states have raised taxes.

"When states cut spending, they lay off employees, cancel contracts with vendors, eliminate or lower payments to businesses and nonprofit organizations that provide direct services, and cut benefit payments to individuals," the group said.

(Reporting by Lisa Lambert; Editing by Andrew Hay)