Forty-five of the 50 U.S. states are confronting budget deficits this year -- a collective total of $40 billion. And even with a sustained economic recovery next year -- something that's not guaranteed -- the states might not be financially better off. However, at least for now, states are not jettisoning their core economic-development programs and junking the incentives they use to entice industry. To be sure, trendsetter states such as California, which had a $23.6 billion budget deficit this year, have closed regional economic-development centers, laid off personnel and reduced some incentives including grants and loans. Other states facing billion-dollar budget shortfalls, such as Connecticut and Indiana have not touched, in any significant way, their mainstay economic-development programs or incentives -- although they have imposed some limits or reductions. Connecticut, for example, put a $1.5 million cap on corporate tax credits for biotechnology firms, and Indiana reduced its technology and research fund from $25 million to $15 million for projects with promising commercial applications. Indeed, most states are trying to make the best of an economic bad time. A few have actually increased their economic-development incentives, and some have revamped their business-tax structure as part of a strategy of recovery from the 2001 U.S. recession. For example, Indiana raised its corporate tax but eliminated its gross receipts and inventory tax, and North Carolina increased its infrastructure economic-development fund to $15 million from $2 million when the recession was at its depth last year. "Ironically, in some ways the tougher the economy gets the more the states need to maintain their commitment to economic development," says Miles Friedman, president of the Woodbridge, Va.-based National Association of State Development Agencies. "Among the economic-development agencies, I think you're more likely to see shifts in program emphasis and an increased targeting in terms of being sure that they are going after their best prospects both inside and outside of the state." Friedman believes states are moving away from cash-based incentives to employee-development and infrastructure incentives that protect both the long-term interests of corporations and states, while also helping states better manage cash-strapped budgets. To meet cost-cutting mandates imposed by governors, most state economic-development agencies are targeting operational expenses. And these cuts will likely have an impact on the ability of state agencies to deliver services to every corporation that comes looking for incentives to expand or relocate. "Quite simply, it reduces our capacity to deliver services from technical assistance, to working with communities around the state to help them attract or retain businesses, to work on infrastructure projects and the ability to promote the State of Washington as a desirable state to work and live," says Robin Pollard, director of the state's economic development division. Pollard had to cut 12% of her division's operational budget because of the state's $1 billion gap. Next year, the state's budget deficit may climb to $1.6 billion. "We're looking at things to get worse before they get better," Pollard says. That's a reality that states and their economic-development programs may be operating within for a while longer. The Washington, D.C.-based National Association of State Budget Officers (NASBO) warns that even with economic recovery, it may be 12 to 18 months before states begin to see their coffers refill. "Personal and corporate income tax collections often lag changes in income by at least six months," states a NASBO report. In the meantime, state economic development agencies are being forced to focus on their top priorities to get the most out of their resources, says Robert E. DeRocker, executive vice president of Development Counsellors International (DCI), a New York-based firm that specializes in economic-development and tourism marketing and public relations. DCI, for example, is helping the State of Washington develop a new marketing plan aimed at leveraging such less-expensive initiatives as nurturing relationships with corporate executives in charge of site selection, as well as reaching out to key members of the media to pitch article ideas on the state's economic-development efforts in troubled times. The plan also includes a redesign of the state's Web site. A continent away, North Carolina Governor Michael F. Easley last year increased the state's fund for economic-development infrastructure projects to $15 million from $2 million. "It's often the type of money we can use to tip the balance in our favor while recruiting companies," says Melinda Pierson, spokeswoman for the North Carolina Department of Commerce. But because of the state's $1 billion deficit, the department was forced to cut its operational budget by 11%, including freezing all spending on advertising and marketing. Last year, the state spent a paltry $80,000 on advertising. "In the short term, it's bearable, but in the long-term we are going to have to advertise along with our competitors," says Pierson. What happens if the U.S. economy double dips back into recession or stays flat in the months ahead? Might states be compelled to take location incentives off the table? There will be no major reductions in incentives because it would be devastating to states, believes Jay Biggins, president of Stadtmauer Balkin Biggins, a Princeton, N.J.-based firm that specializes in economic-development strategies for corporations. "When economic conditions are most challenging it's most dangerous for states to cut back on their incentives," stresses Biggins. "Companies also require predictability in their business planning. If states become unpredictable in funding commitments to incentives, then companies will start to become insecure about doing business in those states," he asserts.