RENEE MONTAGNE, HOST:

This month, we've been taking a look at state budgets. They remain in crisis for populous states like California and Illinois. But in Tennessee, the governor will deliver his State of the State address tonight with some extra money in his pocket - enough money that he's talking about tax cuts.

From member station WPLN, Blake Farmer reports.

BLAKE FARMER, BYLINE: Twelve months ago, Tennessee Governor Bill Haslam paraded into the Capitol behind a marching band blasting "Rocky Top."

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FARMER: Spirits were high, but rocky was a fair way to describe the new governor's budget, which had a lingering $200 million hole. Federal stimulus money was running dry. And while down from its peak, unemployment was creeping back toward double digits. Haslam said the state needed a diet of efficiency.

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GOVERNOR BILL HASLAM: That's the only way we will get our fiscal house in order before the market brutally does it for us.

FARMER: Haslam has not had to wield the ax as much as once thought. There have been layoffs. Building projects have been limited, and social service departments have generally made do with less. But now, unemployment is down closer to the national rate. A state consumer confidence survey from December shows notable gains. Sixty-two-year-old Ray Age is one of 270,000 in the state still without work, but even he's optimistic.

RAY AGE: The employment market is going to turn around. It has to.

FARMER: With no income tax, Tennessee lives and dies by the sales tax. And revenues have increased each of the last 21 months. Now the kind of cuts Governor Haslam is proposing draw applause.

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FARMER: Earlier this month, the governor introduced a pair of modest tax cuts - lowering the tax on food and trimming back the estate tax. The governor says that drives wealth to other states.

HASLAM: There's a whole lot of people who used to live in Tennessee who don't anymore because it's cheaper to die in Florida.

FARMER: But talk of tax cuts has some reminding the governor how long they've gone without.

ROBERT O'CONNELL: The best way to put it is that the budget has been balanced upon the backs of state workers.

FARMER: Robert O'Connell directs the state's employees association. With no collective bargaining power, the state's 46,000 workers haven't had much say as they had to forgo raises for several years. O'Connell says it's becoming increasingly difficult, though, to say the state doesn't have the money to increase pay.

O'CONNELL: And it does make folks that work as state employees, it's making them restless.

LIEUTENANT GOVERNOR RON RAMSEY: People need to understand, though, that when we say that revenues are up, that's all relative.

FARMER: Republican Ron Ramsey is speaker of the State Senate, and points out the budget still hasn't climbed back to where it was five years ago. So he's trying to limit expectations from groups like college presidents, who want to borrow $2 billion for a backlog of projects.

RAMSEY: I can understand their line of reasoning in the fact that we do have some pent-up demands here.

FARMER: But Ramsey says he'd like to keep Tennessee's coveted spot as one of the least-indebted states in the country. The administration's conservative approach isn't getting much pushback from Democrats. Craig Fitzhugh is the minority leader in the State House.

STATE REPRESENTATIVE CRAIG FITZHUGH: I think you'll find that we have some agreements with the governor. We think that he's moving in the right direction on some matters.

FARMER: While Democrats don't have much choice but to go along with the solid Republican majority, Fitzhugh does credit cooperation - at least on economics - with landing Tennessee in its somewhat enviable position.

For NPR News, I'm Blake Farmer, in Nashville. Transcript provided by NPR, Copyright National Public Radio.