The impulse by some state leaders is to slash state spending, but that could be disastrous for the economy if multiple states lay off state workers and cut-off help to those in need just as private spending is falling.
In fact, the right kind of revenue increases may be just what is needed for economic recovery. As Nobel Prize winning economist Joseph Stiglitz of Columbia University, and Peter Orzag, now the director of the Congressional Budget Office, have emphasized, budget cuts during a recession will usually hurt state economies far more than tax increases, since cuts come dollar-for-dollar out of the economy, while tax increases, especially if targeted at the wealthy, often "reduce saving rather than consumption, lessening its impact on the economy in the short run."
Read the whole thing, it's well worth it. Though, noticeably absent from that piece on on how best to deal with a budget shortfall is the creation of casinos. Gee, I wonder why?