The rating company changed its credit outlook on states to negative from stable as sales, corporate and income taxes fall below forecasts. States will likely borrow more to fund programs, Moody's said. A downgrade can boost taxpayer borrowing costs as investors demand a higher return for increased risk.

Half of U.S. states, including New York, New Jersey and California, are projecting budget deficits next fiscal year amid the worst housing slump in 16 years. States that had robust residential real estate markets, such as Florida, Arizona and Nevada, have been particularly hard hit, the Center on Budget and Policy Priorities, a Washington-based research group, said in a Jan. 28 study.

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