Jan. 28 (Bloomberg) -- Half of U.S. states are projecting budget deficits next fiscal year as the slowing economy curbs tax collections, forcing local governments to spend savings, cut funding for programs, borrow or raise taxes, a report found.

The Center on Budget and Policy Priorities, a Washington- based research group, said that the shortfalls are estimated to total $31.7 billion to $34.5 billion in 19 states, an amount equal to at least 8 percent of their spending, with unspecified gaps forecast in another six. The number is up from December, when the group found 13 states anticipated deficits.

Declining sales of homes and the first drop in prices in at least four decades has damped consumer spending and job growth, eroding the sales and income taxes that fund state governments. In California, Governor Arnold Schwarzenegger proposed releasing inmates early and closing state parks, among other steps.

``The bursting of the housing bubble has reduced state sales tax revenue collections from sales of furniture, appliances, construction materials, and the like,'' the center said in its report. ``If the employment situation continues to deteriorate, income tax revenues will weaken and there will be further downward pressure on sales tax revenues as consumers become reluctant or unable to spend.''

During the third quarter of 2007, state tax revenue grew at a slower pace than inflation for the first time in four years, according to the Nelson A. Rockefeller Institute of Government. The pace of economic expansion has diminished since then, according to forecasters, which would put further pressure on state budgets.

Tax Receipts

The slower growth of tax receipts is coming as governors and lawmakers work to assemble their spending plans for next fiscal year, which begins in July for all but four states.

The pressure has led some officials to seek new money. Massachusetts Governor Deval Patrick proposed selling casino licenses to help close a $1.3 billion budget shortfall. Vermont Governor James Douglas proposed leasing the state lottery. Schwarzenegger, facing a $14 billion deficit, has suggested selling $3 billion of bonds, approved by voters in 2004 when the state was facing its last fiscal problems, to help pay the state's bills.

The shortfalls are largest in some of the states whose economies were driven by the real estate boom. Arizona, the second-fastest growing state by population, is expecting a budget deficit of as much as $1.7 billion, some 16 percent of its spending from general tax revenue, according to the report. Nevada, the fastest growing state, is forecast to have a shortfall of $565 million, 7.8 percent of its budget.

Real Estate Deficits

Other states facing deficits include Florida, Ohio, New York and New Jersey. Not all states are in trouble, however. New Mexico, Alaska, Montana and Wyoming are benefiting from high oil prices, according to the report.

U.S. states, unlike the federal government, typically can't just borrow all the money they need when economic slowdowns cause revenue to fall short of their expectations. That leaves them forced to curb spending, draw down reserves or find new sources of money, such as short-term loans or new taxes.

Following the U.S. recession in 2001, 34 states reduced funding for health care and education programs, according to the center's report. More than 1 million people lost their health- care coverage because of those cuts, according to the report.

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

Last Updated: January 28, 2008 15:19 EST