While U.S. Dickers On Stimulus, States Face Big Budget Squeeze Their outlays grew 7.5% a year in late '90s, easily topping worker salaries.(A)

Byline: CLAIRE MENCKE

While federal officials dicker over the details of a stimulus plan for the economy, state officials are grappling with a bigger problem.

For the first time in a decade, they're facing big cash shortfalls. After a decade of heavy spending, they're mulling budget cuts, tax hikes or both.

State tax receipts swelled with the booming economy in the 1990s. Budget surpluses were common. Many socked away funds in rainy-day accounts and other reserves. Some even slashed taxes.

State spending surged an average of 7.5% a year from 1995 to 2000, says the American Legislative Exchange Council. By comparison, people's incomes grew 4% a year before inflation.

But most states were struggling with finances for some months before the Sept. 11 attack. Midwest and Southeast states saw tax receipts fall first, says Nicholas Jenny, a researcher at the State University of New York's Rockefeller Institute of Government.

Those regions depend on factory jobs, which were the first -- and worst -- hit.