WASHINGTON DC – State and local governments should expect to see negative repercussions from the fallout of the global financial crisis, especially in terms of overall tax collections, contends a paper released by the US Senate Fiscal Agency.

The paper, part of the state notes section of the SFA that is issued every two months, did not estimate any specific effects the crisis could have on the economy, stating “it is clear the economic activity will be slower than had been projected previously and tax revenue will be less than previously estimated.”

The paper outlines steps the U.S. government has taken, through the emergency package that would spend up to $700 billion to purchase bad assets and actions to boost the maximum amount of deposit insurance covered under the Federal Deposit Insurance Corporation, to help cover the immediate effects of the financial crisis.

It also outlines actions like the Federal Reserve’s decision to lower the Federal Funds rates, the rate charged by banks on loans to other banks, and the Fed’s action to make short-term loans to businesses in light of the collapse of the commercial paper market, to shore up the economy.

The paper itself made no mention but on Monday automotive sales for October were announced that showed a general collapse in those markets. Experts also anticipated the national unemployment rate increased in October, though those figures will be released on Friday.

Since credit availability has been cut back severely, the paper anticipated that spending by consumers and businesses will decrease, which will drive a decline in all the state’s major taxes: sales, income and business taxes.

In the 2007-08 fiscal year that ended September 30 (although October revenues accrue to the previous fiscal year), overall revenues were up. Projections for the 2008-09 fiscal year were for some increases, but those likely will be revised and lowered.

The paper also warned that state and local governments will be forced to make budget cutbacks, which will in turn hurt the economy and further reduce revenues.

The state so far has not made any short-term borrowings to help with cash flow, preferring to hold that off until the markets stabilized. Typically the borrowing is made in October, but officials are now looking at making the borrowing possibly this month.

The paper also said capital outlay borrowings by state and local governments could be delayed and cost more.

The paper said the multi-billion dollar drop in the state’s pension fund will force an increase in pension contribution rates paid for both public school employees and state government workers.

This story was provided by Gongwer News Service. To subscribe, click on Gongwer.Com

a>>