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U.S. state revenues can't cover stimulus end-report

* Budget gaps emerge in 15 states

* Confusion on Medicaid funding levels contributed to gaps

* Some states have had to cut budgets for 3 years

WASHINGTON, Dec 8 (Reuters) - U.S. states are not pulling in enough revenue to make up for a shortfall that will emerge when the federal stimulus plan ends, with nearly a third of them reporting that gaps are already emerging in their budgets, report on Wednesday by a state legislatures’ group found.

The federal stimulus plan passed last year known as the American Recovery and Reinvestment Act, began winding down this summer and many of the measures included in the plan to help states will end this month.

“This will create big holes in state budgets, what many officials are calling the ‘ARRA cliff,’” NCSL said. “The stimulus funds have helped support state budgets since fiscal 2009, so their dramatic decline -- they will essentially be gone by fiscal 2012 -- will pose additional budget challenges for state officials.”

When creating their budgets for this fiscal year, which for most states began in July, states had to find a way to make up for budget holes that totaled $83.9 billion, according to NCSL.

Because all states except Vermont must end their fiscal years with balanced budgets, they had to slash spending and raise taxes in the face of such a large shortfall.

For most states, this marked the third or fourth consecutive year of budget gaps. Now, midway through fiscal 2011, new gaps have opened in at least 15 states, NCSL found.

As revenue collapsed during the recession that began in 2007, the federal government stepped in with an $814 billion economic stimulus plan. It included the largest transfer of funds to the states in U.S. history -- more than $150 billion.

Many of the specialized funds have been exhausted. Others are set to expire at the end of this month. In six months states will see the end of the extra Medicaid dollars the federal government sent them in what is considered the biggest boost from the stimulus plan.

Part of the problem is that when some states were drafting their budgets this summer they assumed they would receive more money for Medicaid, the healthcare program for the poor. The funds were set to end this month, but this summer Congress decided to extend the funding for six months, albeit at a significantly lower rate.

NCSL said that in Colorado, $57.5 million of the state’s current budget gap is a result of unexpectedly low revenue, and $67.2 million of the gap was caused by an incorrect estimate of the Medicaid extension funding levels.

The new budget gaps for this year total $26.7 billion with the largest imbalances in Illinois and Arizona, NCSL found. For months now, signs have emerged that indicate state economies are moving toward recovery. Unemployment rates are lower in almost all states from a year ago and tax revenue is on the upswing. A report from the National Governors Association and National Association of State Budget Officers released last week found that this fiscal year “will present a slight improvement” over the last.

But there are also signs that this pace of recovery is too slow.

“Revenues for the first few months of fiscal 2011 gradually are performing better than they have in recent years,” NCSL said. “Though tax performance has has done so unevenly across the states.”

While Massachusetts has collected $413 million more in taxes than it had expected this year, Oregon’s personal and corporate tax collections are below estimates, NCSL said.

Of the 41 states that levy personal income taxes, 16 said their collections exceeded their estimates. Connecticut and Iowa collected more personal income taxes than they forecast in estimates they upwardly revised recently. Out of the 45 states that charge sales taxes, 19 brought in more revenue than they expected, as well, NCSL said.

“As revenues continue their slow climb out of the trough of the recession, the outlook for the remainder of the budget year indicates steady improvement,” NCSL said “Although officials face significant budget challenges in the coming years, improving performance of state revenues is offering some relief.”

Editing by Kenneth Barry