The next stage of the recession is now taking hold with tax revenues being hit hard at the state level (and local levels). As tax revenues decline then the state governments (and local governments) are forced with either hiking taxes to make up the loss, or they cut services and employees.

A vicious cycle recessions can be…

State income-tax revenue fell 26% in the first four months of 2009 compared to the same period last year, according to a survey of states by the nonprofit Nelson A. Rockefeller Institute of Government.

The report, conducted by the public-policy research arm of the State University of New York, is one of the most up-to-date measures of how deep the recession is digging into Americans’ wallets and, consequently, state coffers.

States are required by law to balance the budget, so lower tax revenues will translate in service cuts, rather than red ink. Already states such as Kansas are slowing the payment of income-tax refunds and delaying payments to local school districts, according to the report.

Withholdings from the first four months of 2009 were down 6.9% from the same period in 2008, signaling that “many people had a very bad start of the year” with lower salaries and wages, says Don Boyd, a senior fellow at the Rockefeller Institute.

The time span notably includes the April 15 deadline for filing taxes, a critical time for states to collect revenues.[...]

The plunge in income-tax revenue means some states may have to revise budget agreements for 2009-2010 and may still face gaping holes in 2011, when federal stimulus money runs out. (source: WSJ)