Arturo Perez, a budget specialist for the NCSL, said that last June "states reported their highest year-end balances in 20 years." Perez attributed the abrupt shift to "the softness in the economy." After Christmas holiday spending was lower than expected, Mississippi, Alabama, Tennessee, and other southern states that rely heavily on the sales tax to fund state programs began to announce cuts. Mississippi governor Ronald Musgrove announced a 3 percent cut in the state's education budget in early February. In Alabama, Gov. Don Siegelman cut the education budget by 6 percent, and the state legislature is considering cutting funds for school repair and after-school programs.

North Carolina, a state that has lost a substantial amount of revenue from taxes on capital gains as investors' earnings have slid, has also begun slashing social spending. Gov. Michael Easley, whose state faces a $740 million shortfall, announced February 6 that he would probably declare a fiscal emergency, which would permit him to use state employee pension funds to balance the budget. North Carolina, like most states today, is required by law to balance the budget.

The tax shortfalls are occurring at the same time as many states are spending more on Medicaid, a government program to cover medical expenses of people who could not otherwise afford them. Raymond Scheppach, executive director of the National Governors Association, attributed this rise to increasing numbers of people in the Medicaid program, and higher costs of medications and managed care.  
 
 
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