March 29 (Bloomberg) -- Florida's tax receipts are falling for the first time since 1975 as a slump in construction and home sales dims the economy of the Sunshine State.

``We've been on a pretty steep incline,'' said Florida State Senate Majority Leader Daniel Webster, a Republican from Winter Garden. ``There was always going to be an end to that, and it's flattened out.''

States from New Jersey to California are getting pinched, just a year after many enacted the biggest spending increases in almost two decades. They're drawing down $16.6 billion from reserves this year -- 29 percent of their total savings -- even as legislators debate tax cuts and plans to expand programs such as government-subsidized health insurance.

``A lot of states are starting to worry,'' said Iris Lav, who follows state budgets for the Center on Budget and Policy Priorities, a nonprofit Washington group that monitors state finances. ``We have yet to see the effects of the bursting of the property bubble.''

States depend on sales and income taxes for about two-thirds of their revenue, according to the National Conference of State Legislatures. A decline in new home sales depresses employment in the construction industry. Falling prices of existing houses also discourage people from borrowing against home equity. The result is lower consumer spending, and less tax revenue.

California Deficit

In California, the most populous state with 36 million residents, a balanced budget that Governor Arnold Schwarzenegger forecast for the fiscal year starting July 1 may swing to a deficit as tax revenue trails estimates by $847 million.

Rhode Island may cut state workers' pay 1 percent because of a $105 million hole in the current budget. Arizona's revenue growth is forecast to slow to 3.7 percent next year, down from 19 percent in fiscal 2006, after income and business tax cuts.

Bond investors have yet to demand higher returns from states to compensate them for the potential risk. In California, a 10- year general obligation bond yields 0.20 percentage point more than top-rated municipal debt, one-fourth the premium demanded in early 2004 and little higher than the 0.12 percentage point difference in early 2001 before a state budget crisis confronted the state with a record $38 billion deficit.

The slowdown in tax collections comes after five years of expansion, surging demand for new homes and soaring real estate prices produced windfalls that gave many states surpluses. California and New York won improved credit ratings and the borrowing climate remains favorable -- for now.

Budget Outlook

``The best you can hope for is that it stays the same,'' said Joe Darcy, who oversees $3 billion of municipal bond funds for Dreyfus Corp., a unit of Pittsburgh-based Mellon Financial Corp., referring to the budget outlook for state bond issuers.

New home sales unexpectedly fell in February to the lowest level in almost seven years, the U.S. Commerce Department reported March 26.

State revenue growth will be less than half what it was last year, rising 3.1 percent, according to the National Conference of State Legislatures. State spending has been expanding at more than twice that rate.

``Despite a momentary cash infusion, we are operating in a deficit environment, with out-year deficits conservatively estimated in the tens of billions of dollars,'' New York Governor Eliot Spitzer said in a Jan. 3 state-of-the-state speech.

Tapping Reserves

The cautions come amid predictions that the U.S. economy will accelerate in the second half of this year, according to the median forecast of more than 70 economists surveyed by Bloomberg News. Home prices in some parts of the country, such as Southern California, are still setting records even as fewer homes change hands.

``We think this is just a one-year realignment,'` said Webster, the Senate majority leader in Florida. ``It's also an opportunity to make sure you're spending all your money in the right place.''

States are tapping their reserve funds to restore spending or bolster schools and other programs. Reserves are anticipated to fall to $41.2 billion from $57.8 billion by the end of the budget year, according to the national state legislators group.

States also face additional pressure in the years ahead for retirees' pensions and health benefits, as well as the rising ranks of the uninsured and escalating health care costs. Illinois Governor Rod Blagojevich proposed borrowing as much as $16 billion in bonds and leasing the state's lottery to help narrow a deficit caused by rising pension costs.

Florida Sales

The housing boom -- and the slowdown -- has affected Florida more than most states. Five of the 11 metropolitan areas with the greatest home price appreciation are in that state, Fitch Ratings says.

During the last three months of 2006, previously owned homes in Florida sold at a rate that was 31 percent lower than the year before, according to the National Association of Realtors. Only Nevada showed a bigger drop. Housing starts in Florida dropped 24.8 percent in 2006 compared with 2005, according to state data.

Florida officials have reduced their estimate of state revenue for this year and next. Budget leaders in the state's House of Representatives proposed on March 27 a $70.2 billion budget that cuts spending by $1 billion from a year earlier.

The change means that the state's general fund revenues are expected to drop to $26.8 billion from $27.1 billion a year earlier, the first decline since 1975, said Jim LaCrosse, an analyst with the legislature's Office of Economic and Demographic Research.

`Rebuilding Boom'

``We're coming off a very hot housing market and we're also coming off a rebuilding boom from the hurricane,'' LaCrosse said. ``We're seeing the state go back to more normal levels of activity.''

Florida got about 72 percent of its general fund revenue in 2006 from sales taxes and also collects fees such as those paid by driver license applicants. The biggest blow to the budget will come from an anticipated drop of $616 million next year in the documentary stamp tax, which is drawn from transactions such as the sale of mortgages or property deed transfers.

Florida, like many other states, will rely on reserves to compensate for the slowdown and will likely draw down such money to $2.7 billion from $5 billion by the end of last year, LaCrosse said. Governor Charlie Crist, a Republican who succeeded Jeb Bush, proposed a 3 percent spending cut in his budget, mostly because of a decline in anticipated costs for health care and road building. He has said he wants to boost spending on schools and cut property taxes.

Auto Industry's Woes

Some states never fully recovered from the 2001 recession sparked by the collapse of the Internet bubble, according to a December report by the Center on Budget and Policy Priorities. In more than half the states, general fund spending, as a share of the economy, is smaller than it was in the 1990s as cuts to education and health care remain in effect.

The auto-industry's woes have continued to weigh on Michigan even through the times when other states were enjoying double- digit revenue gains.

Governor Jennifer Granholm issued an executive order March 22 to cut $344.6 million in spending as a first step toward closing a $3 billion budget deficit for this year and next. The programs that were cut included funds for job training and indigent burials.

California has faced budget shortfalls during each year of the current economic expansion. While Schwarzenegger said there would be a balanced budget and more spending next year, revenue has since lagged behind his estimates.

That hasn't stopped the California governor from proposing a $12 billion program to offer state-managed health insurance to residents now lacking coverage. Schwarzenegger said the funding - - from sources such as the federal government and new fees on businesses and the health industry -- won't affect the budget. The state's fiscal analyst said California could face as much as $3 billion a year in unanticipated costs.

New Jersey Shortfall

In New York, Spitzer has battled lawmakers to limit increases that he says would lead to an $8 billion mismatch between spending and revenue next year.

New Jersey, the most densely populated state and the one with the highest average property taxes, is facing a $2.5 billion budget shortfall next year, putting the strain on state agencies as Governor Jon Corzine pursues a cut to property taxes that soared along with home prices.

``We remain one of only six states with a structural deficit after four and a half years of national economic expansion,'' Corzine said this month.

Massachusetts, forecasting a $1.3 billion deficit next year, is also facing the costs of a universal health care plan that will be phased in later this year.

Ohio Debt

``There's still a lot of uncertainty about what those costs will be,'' said Noah Berger, director of the Massachusetts Budget and Policy Center, a nonprofit research group.

Ohio Governor Ted Strickland, elected in November, this month proposed the slowest growing two-year budget in 42 years, in part because of a battered manufacturing economy and tax cuts passed under his Republican predecessor that are being phased in. Moody's Investors Service lowered its outlook on Ohio bonds last month, the first step toward a downgrade.

``We have to live within our means,'' said Michael Skindell, the top Democrat on the House of Representatives Finance and Appropriations Committee. ``The tax changes really tie our hands in many ways.''

The pressure on states may increase the appeal of selling assets. Indiana last year sold a toll road concession and Pennsylvania may follow suit. Texas and Illinois are among those that have considered leasing their lottery systems to private operators. Both New Jersey and California refinanced tobacco bonds to free up more cash this year.

Weathering the Storm

Some states are better able to cope with the real-estate slowdown. Washington, for example, raised its revenue forecast by $144 million for the current budget year. And Florida, even after the housing bust, is forecast to begin growing again in fiscal 2008.

``We're perfectly capable of weathering this storm,'' said Florida's LaCrosse.

States that have struggled harder to shake off the last recession may not bounce back as fast.

``There is enough of a body of evidence that says you should be paying attention to it,'' said Dreyfus's Darcy. ``I think you are going to see some cracks in the budgetary foundations.''

To contact the reporter on this story: William Selway in San Francisco at at wselway@bloomberg.net.

Last Updated: March 29, 2007 00:19 EDT