Economy continues to hurt states

A Reuters article (11/3/11) by Nanette Byrnes - "Analysis: Economy's shifts erode states' tax bases" notes some new and continuing woes for state budgets:

• Growing pressure on volatile personal income taxes for revenues.
• Figuring out how taxes apply (or don't apply without legislative change) to new economy transactions such as Groupon and Living Social coupons and e-commerce in general.

States have been in tough times for several years now. Some of their woes were covered via tax shifts, such as suspending the use of net operating losses and credit carryovers. Temporary tax increases were also used, such as in California. But the temporary tax increases may have expired, such as is the case in California, under the initial thinking that the economic downturn would have reversed by now.

What should California and other states do to address continuing budget woes caused by weakened revenue collections due to the weakened economy? What do you think?