Starting this month, under rotundas across America, state governments will start slicing their budgets to eliminate a combined $58-billion deficit. Companies that depend heavily on state spending have obvious reason to be very nervous. But they're not the only ones. Many other businesses will take a hit. "State and local governments form the largest single vertical market in this country, a market of almost half a trillion dollars," says Peter Harkness, editor and publisher of Governing magazine. "If you take away military spending, the market is five times as large as the federal government." That means that whatever your company's product or service -- computers, telecommunications, architectural services, prescription medications, even gravel for roads -- state and local governments will be looking to give you less business next year.

The numbers tell the story. In fiscal year 2002, state and local governments bought $441.5 billion in goods and services from the private sector. This fiscal year that figure is expected to increase by slightly more than 3%, to $454.9 billion. Compare that with an 11% increase in spending in both 1999 and 2000. At the same time that states look for line items to cut, says Harkness, most will also be bumping up taxes to balance their books -- taxes on personal income, corporate income, property, and sales. Indiana has already gone the levy route: it increased its sales tax by 1 cent last year. New Jersey didn't actually raise corporate taxes, but it did close some loopholes, which increased corporate-income-tax collections for fiscal year 2002 by an estimated $600 million to $800 million.

Companies will experience indirect effects of the state deficits as well. Police services will likely be cut, leaving companies to bulk up security. Infrastructure improvements to distressed highways and bridges will be put off, making the nation's distribution network less efficient. Court services and worker-training programs will also be hit. And then there's education. "Small businesses without internal training programs depend on a well-educated workforce," says Elizabeth McNichol of the Center on Budget and Policy Priorities, a Washington, D.C., think tank.

How long will state spending remain tight? "Experience from previous recessions shows that it takes a year to 18 months for state revenues to recover," McNichol says. The recovery in the early 1990s was fueled by a boom in capital-gains collections that may not be repeated. And what McNichol calls the "12-to-18-month clock" is not even ticking yet. In recent forecasts for this fiscal year, states reported no improvement in terms of revenue.

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