WASHINGTON -- States will be forced to raise taxes or cut spending throughout the 1990s to balance their budgets in the wake of slow growth and structural deficits, says a report released yesterday by two groups representing state officials.

"We're relatively pessimistic about states' revenue and fiscal picture over the rest of this decade," said Raymond Scheppach, executive director of the National Governors' Association, during a news conference. "Until concerted action is taken to eliminate the structural deficits, states will continue to struggle."

The annual report, "The Fiscal Survey of the States" is based on a survey of budget officers from the 50 states. It is a joint effort of the governors' group and the National Association of State Budget Officers.

State budgets in fiscal 1991 and 1992 were traumatized by the recession. Conditions improved in fiscal 1993 and are expected to brighten further in fiscal 1994, according to the report. In most states, the fiscal year begins in July and ends in June.

"States have maintained greater budget stability this past year," the report says.

However, the report paints a relatively dismal picture for states over the longer term because state spending is expected to grow faster than the economy as a whole while state revenue is expected to grow at a slower pace. Making matters worse, the economy is expected to grow at a slightly sub-par pace during the 1990s, the report says.

Scheppach said that controlling health-care costs would help states the most. "Health care is breaking all levels of government," he said. "Capping costs would go a long way to giving us some help."

To date, the governors' group has not taken a position on the Clinton Administration's health-care reform plan because all the details have not been released yet, Scheppach said. But he said the group was consulted by the Administration on selected aspects of the plan that would directly affect states, and most governors support those parts of the plan.

Judging by current trends and despite cost controls, Medicaid is expected to absorb 25% of state budgets by 1995, compared to 10% in 1987, the report says.

Scheppach also said states need to undertake fundamental reform of their tax systems if they want to get their fiscal houses in order. States should approach taxes with a more comprehensive view, he said, and consider some form of value-added tax rather than increasing sales taxes.

Another problem for states is that in recent years they have been inclined to impose more user fees than new taxes. And revenues from fees, unlike taxes, do not grow naturally with the economy, Scheppach said.

According to the report, states expect to collect 4.2% more in tax revenue in fiscal 1994 than in 1993. This, the report says, is expected to come from 5.2% higher personal income tax receipts, 3.6% higher sales tax collections, and 2.8% greater revenues from corporate income taxes.

For 1994, states enacted $3 billion of tax hikes that represent 1% of states' general fund budgets, the report says. This is comparable to the total of tax hikes in 1993 but well below the $15 billion in tax increases in 1992 and $10 billion in 1991, the report notes.

On the other side of the balance sheet, states anticipate spending 4.6% more out of their general fund budgets in 1994 than in 1993, which saw a 3.3% increase over the previous year, the report says.

The report notes that these spending gains pale in comparison to the 1980s, when state spending on average advanced 8% annually.

In the 1990s, similar to the 1980s, states find themselves spending more money and providing less service. Selected categories of spending, namely health care and prisons, continue to eat up bigger and bigger shares of the pie, the report says.

States' yearend budget balances, one measure of overall fiscal health, apparently have rebounded from lows in 1991 and 1992, the report says. The 1993 and 1994 yearend balances are expected to be 3% and 2.5%, respectively, of total state budgets.

Scheppach said financial analysts like to see yearend balances at 5% or higher. But states have improved considerably from the 1.1% level in 1991, the lowest level in at least 12 years, according to the report.

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