Oct. 31 (Bloomberg) -- California, New York and other states, already grappling with combined budget deficits of $8.9 billion, face almost two years of declining tax revenue, said Leonard Santow, a former Federal Reserve economist.

Personal and corporate income taxes along with sales taxes will begin declining in the quarter that began this month, and won't grow again until April 2010, Santow said at a conference in Providence, Rhode Island. He based his forecast on changes in federal receipts, and used existing state revenue figures assembled by the Nelson A. Rockefeller Institute of Government.

``The numbers are astounding in terms of lost revenue,'' Santow, a managing director at Griggs & Santow Inc. in New York, and former economist at the Fed's Dallas branch, said yesterday. ``The rates in the municipal market might become more normal, but now the budget problems will take over.''

At least 21 states and the District of Columbia face a combined shortfall of $8.9 billion this fiscal year as the economy weakens and unemployment rises, the Center on Budget and Policy Priorities said on Oct. 10. The Commerce Department said yesterday the U.S. economy contracted at a 0.3 percent pace from July to September, raising the prospect of a deep recession, defined as at least two quarters of declines.

State tax collections rose 3.6 percent between April and June this year, the most recent data available, the Rockefeller Institute, which is based at the State University of New York in Albany, reported on Oct. 7. The gain was driven entirely by personal income tax revenue as both corporate income and sales tax collections fell, the data show.

Flat Quarter

Tax collections will be flat in the quarter that began in July and will fall 3 percent from October to December, based on trends in existing federal tax collection figures reported by the U.S. Treasury, Santow said at a municipal conference organized by Rhode Island Treasurer Frank Caprio. State taxes will fall by as much as 10 percent before resuming growth, he said.

Governors from New York, New Jersey and other states, as well as organizations representing local governments and other public officials, are asking Congress to increase spending on Medicaid and infrastructure in a fiscal stimulus package estimated now at $150 billion that lawmakers are debating.

States facing deficits are either cutting or freezing local aid to municipalities, exacerbating a drop in revenue as the real estate market softens, said Alan Lord, finance director in South Kingston, Rhode Island. The fees related to real estate transactions that are paid to cities and town are dropping, as is investment income, he said.

``That growth isn't there anymore,'' said Lord, whose town has a $74.2 million budget. If the assessed value on homes starts falling, the town will need to offset the change with an increase in property tax rates, and ``people are not going to want to see increases in the tax rate,'' he said.

To contact the reporter on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net.

Last Updated: October 31, 2008 11:46 EDT