By David Clarke, CQ Staff

After being spurned by House leaders, states facing a host of fiscal problems are turning to the Senate as their best hope of getting a lifeline in economic stimulus legislation.

Governors are placing particular faith in the Finance Committee, which is expected to mark up its own stimulus bill the week of Jan. 28. “That will be our focus in the short run,” said Raymond C. Scheppach, executive director of the National Governors Association.

Several senators have supported adding state aid to a stimulus package, including senior members of the Finance Committee such as John D. Rockefeller IV , D-W.Va.

“I would hope that we would do what was done in 2003, which is include a temporary increase and match for Medicaid,” said Debbie Stabenow , D-Mich., who also sits on the Finance panel.

Medicaid is a particularly big strain on state budgets.

Last week, House Democratic and Republican leaders reached a deal with the Bush administration on a $150 billion stimulus plan that focuses on tax rebates for individuals and tax breaks for businesses.

Senate Democrats, however, are interested in adding an extension of unemployment insurance and more funding for food stamps, which could delay a final deal.

Governors are hoping to hitch state aid to a fast-moving package, as well.

Several states are facing budget crunches because of the slowdown in the economy, which hurts sales tax collection. In addition, property taxes that helped local governments weather an economic slowdown earlier in the decade are being pinched by the housing downturn.

Except for Vermont, all states have some sort of balanced budget requirement, meaning spending cuts and tax increases are their main options as they search for ways to fill budget gaps.

New York, for instance, anticipates a $4.4 billion shortfall in its 2008-09 budget. Last week Gov. Eliot Spitzer , a Democrat, proposed a variety of actions, including raising fees; limiting planned property tax reductions and new education spending; and creating “efficiencies,” such as closing underused facilities.

A governors association survey shows 18 states face budget gaps this year totaling $14 billion, while another 17 states face potential shortfalls totaling $31 billion in fiscal 2009. Among those reporting shortfalls are California, Massachusetts, Maryland and Florida.

Cushion the Blow

States want Washington to help them cushion the blow. Their sales pitch: If states are required to raise taxes or cut spending, it will be a drag on the national economy. “We’ll offset a fair amount of the stimulus if they don’t help us,” Scheppach said.

Governors last week settled on a strategy of seeking $6 billion for Medicaid, a state-federal program that provides health care for the poor, and $6 billion for block grants that states could use at their discretion. In a 2003 stimulus package, Congress provided $20 billion for those efforts.

Minnesota Gov. Tim Pawlenty , a Republican, and Pennsylvania Gov. Edward G. Rendell , a Democrat, wrote the president and congressional leaders on Jan. 23 urging them to consider their proposal.

Hurdles Ahead

But state aid, like other spending provisions that could be added in the Senate, faces huge hurdles because of opposition from Republicans and the White House.

“It would be irresponsible for Senate Democrats to load this bill up with pork and other spending,” House Minority Leader John A. Boehner , R-Ohio, said in a Jan. 25 statement.

Brian Riedl, a budget analyst at the conservative Heritage Foundation, said state officials partly have themselves to blame and should have done more to prepare for the economic slowdown when times were good, such as by building up rainy-day funds. “If states can’t learn to stop committing to long-term spending when revenues are high, they don’t deserve a federal bailout,” he said.

Another issue is that not all states are facing a budget crunch, raising the question of whether all should receive a cut of whatever aid is allocated.

Governors are concerned not only about what might not be in the stimulus package, but about what it is likely to include.

A proposal to allow companies to immediately write off 50 percent of the cost of equipment purchased and a tax break for small businesses could cost states $4 billion in revenue, according to the liberal Center on Budget and Policy Priorities. This is because most states base how they define tax deductions and exemptions on the federal code, so any change would likely affect state revenue as well.

Business tax cuts appear to be a lock in any final package, leaving the governors association to focus on the spending side of the ledger.

But states may have to wait a while for any relief. When Congress passed a tax package with rebates in 2001 (PL 107-16), state aid was left out. But two years later $20 billion was included (PL 108-27).

“Congress doesn’t see the blood in the streets yet,” said Iris J. Lav, who follows state budget issues at the Center on Budget and Policy Priorities. “I think they have to see it — last time it took until 2003.”