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States bring fuller war chests into battle for business

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Fighting to attract business—and jobs—takes money. And this year, states finally have some more ammunition to bring into battle.

As recently as last year, states were still trying to shrug off the effects of the Great Recession, which is supposed to have ended in 2009.

"States' ability to fund services remains hobbled by slow economic growth," the nonpartisan Center on Budget and Policy Priorities reported last year. As the 2013 fiscal year was about to begin—three years after the start of the national economic expansion—31 states were still contending with budget shortfalls. And since nearly every state has a requirement to balance its budget, the gaps meant more budget cuts.

"The additional cuts mean that state budgets will continue to be a drag on the national economy, threatening hundreds of thousands of private and public sector jobs, reducing the job creation that otherwise would be expected to occur," wrote CBPP researchers Phil Oliff, Chris Mai and Vincent Palacios last June.

One year later, the organization has no plans to put out a new report listing state budget shortfalls, according to a representative of the center. That is how much state finances have improved. Instead, in a new report, the organization this year is urging states to be smart about how they spend a sudden windfall from tax revenues that are rising virtually across the board.

"In 32 states for which data are available, state tax collections in the first ten months of fiscal year 2013 were 5.7 percent higher than in the same period last year, on average," the report says. Most of the growth is in income tax receipts—up 8.9 percent on average—but sales tax receipts are up as well.

(Read More: States Bring Renewed Swagger to Top States 2013)

Figures from another organization, the National Association of State Budget Officers, suggest states are being prudent about the money—at least so far.

State budget stabilization or "rainy day" funds, which had fallen to a low of $32.5 billion or 5.2 percent of spending in fiscal 2010, swelled to $57.7 billion or 8.3 percent of revenue in fiscal 2013, the association reported in March. The report notes, however, that most of the increase was concentrated in two states: Alaska and Texas, whose fund balances account for more than 44 percent of the national total.

With the onset of the state fiscal crisis in 2008, CNBC began considering state finances in our rankings of America's Top States for Business. As part of our Economy category—which also looks at factors like economic growth, unemployment and the health of the housing market—we also look at the states' budget situations and their bond ratings. (The handful of states that do not issue debt get extra points in the category.)

The category takes on increased importance in 2013—worth 375 points, up from 325 in 2012—because more states are confident enough in the health of their economies to list it as a selling point to attract new business.

Wisconsin's Economic Development Institute website, for example, lists "A diverse and well-developed economy" as the top reason to do business in the Badger State.

The Nebraska Department of Economic Development site lists the state's "positive economic environment," including the nation's lowest pension and debt obligations.

But just like the overall economic recovery, the recovery of state balance sheets is uneven. And the revenue numbers do not necessarily tell the full story. Take Illinois, where state tax revenue surged 19 percent last fiscal year, according to the U.S. Census Bureau.

(Read More: Top States for New Manufacturing Jobs)

Most of the gain comes from a 67 percent tax increase signed into law by Gov. Pat Quinn in 2011 to shore up the state's finances. The temporary increase is set to expire, and Illinois' financial situation—including $100 billion in unfunded pension liabilities—has not improved much. On June 6, Moody's Investors Service downgraded $27 billion in Illinois general obligation bonds, warning the state remains on "a path to fiscal distress."

Even in healthier states, experts warn the improvement could be illusory.

In its latest report, the Center on Budget and Policy Priorities warns that some of the increase in tax revenues comes not from economic growth, but from "wealthy taxpayers shifting income into 2012 that they would have received in 2013" to avoid the federal income tax increase on top earners. The center also notes that despite the improvement, revenues are still more than 3 percent below pre-recession levels, after adjusting for inflation.

"States should proceed with caution in using these funds," the report warns.

And the National Association of State Budget Officers, while acknowledging that "fiscal distress is finally beginning to subside for most states," warns they are not out of the woods.

(Read More: Categories and Criteria for Top States 2013)

"(S)tate operating budgets likely will be constrained by elevated expenditure pressures and slow revenue growth in the upcoming fiscal year," the association said.

Translation: Fighting the economic battle for business will remain a challenge.

—By CNBC's Scott Cohn. Follow him on Twitter @ScottCohnCNBC.

  • Scott Cohn develops in-depth features, special reports and documentaries for CNBC and CNBC.com.

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