Today I was chatting with Frank Curzio of TheStreet.com about the state of New York changing a policy regarding property taxes. It appears that a special credit that was previously available will be canceled as New York is struggling to come up with the money to cover a massive tax shortfall.

Then, as was reading a few news items I was struck by new report that shows the state by state tax shortfall estimated. Last August we speculated that New York was going to have great deal of difficulty as the financial crisis was going to create a great deal of pain as an oversized level of unemployment will hit the area hard.

Now, months later, we are seeing the problem spread as housing values continue to slide and unemployment continues to rise. The chart below shows the annual change from last year’s 4th quarter for state tax revenues. The dark blue indicates a reduction of more than 25%. The entire eastern seaboard is going to have massive budgetary problems and most states are now looking for create ways to reduce the budget deficit.

That can come in many shapes and sizes, but many states will be looking toward the taxpayer to fill the deficit. Increasing state sales tax, property tax and payroll tax are already plans being discussed. With the added stress on municipalities not being able to fund their budgets through reasonably priced new bond issuance, these problems are not going away so soon.

One more thought… As employment opportunities are tough in a nation that is expected to see a 10 percent (plus) or more unemployment rate, where is the money going to come from? Certainly there is a direct correlation of the tax base and the employment situation as this is what is driving the housing markets and in turn creating a lower tax base.

This could eventually become a differnt drag on the economy, reversing the stimulus provided by the Federal governeent. Since this is a cost now being shifted to the taxpayer, there does not seem to be a bailout available to help. States and local municipailites are lookig for creative ways to balance their budgets, this is one way, but will be a drag to a national recovery? (not that investors seem to care about reality these days….)

* Graphics – WSJ.com