By Verna Gates and Michael Connor
(Reuters) - On a recent unseasonably warm workday in Birmingham, Alabama, the line to get car-license plates filled two long marbled halls in Jefferson County's downtown courthouse and wound 150 feet into a park.
"This is atrocious," said Rich Sharff, a lawyer, who said risking a fine for an outdated car tag might be cheaper than spending a morning away from work. "My company is losing productivity as I speak to you. Everyone in this line has something else to do."
Residents of Jefferson County are feeling the strain of severely reduced services after the county, home to Birmingham, the state's largest city, last year filed the biggest U.S. municipal bankruptcy in history.
The county is struggling with day-to-day finances, and Alabama's state legislature is offering scant hope that help in plugging chronic budget deficits is on the way.
The legislature is wrestling with its own projected 30 percent shortfall in general fund revenue in fiscal 2013 and has so far shown little interest in reauthorizing a county tax that some say would have stayed the county's bankruptcy filing last November .
The county's plight is an extreme instance of financial stresses afflicting many of America's local governments, even as the national economy improves. Jefferson County's government bankruptcy, caused by decades of fiscal setbacks and corruption, worries bond investors, who fear the county's bankruptcy may shake confidence in some tax-free debt.
The county has already cut annual spending by nearly $100 million and now faces an additional $40 million revenue shortfall after a court decision last year killed off a local occupational tax.
A state senator, Republican Arthur Orr of Decatur, has introduced a bill that would ban all new occupational taxes by Alabama counties, though the legislation has not been acted on.
Jefferson County's occupational tax, a levy on people working in the county, had been in place since 1988 and had delivered $66 million a year to the county government But it was unpopular with commuters who worked at universities, hospitals and banks clustered in Jefferson County.
A court decision nearly a year ago voiding the tax as unconstitutional was central both to Jefferson County's $4.23 billion Chapter 9 bankruptcy filing on November 9 and the government spending reductions.
"We have cut the fat, cut the flesh, and are beginning to saw bones now," said County Commissioner Jimmie Stephens.
More than 500 county workers have been laid off. Inmates at county jails are doubled up in cells, business development deals with financial sweeteners are being unwound, and county buildings have been shut.
Thinned staff slowed the county government's emergency services last month, when heavy storms struck the region and damaged hundreds of properties, according to county officials.
In Clay, a Jefferson County city where two people were killed by a tornado on January 23, the county's emergency response fell short, according to Mayor Ed McGuffie.
"Of course it was slow, and we were disappointed in them," McGuffie said. "They would have helped us if they could."
County officials acknowledged the shortfalls, such as storm debris uncollected and road damage left unfixed. "We just couldn't do everything we needed to do," said the head of Jefferson County's roads department, Wayne Sullivan.
The occupational tax long had opponents, even before the court ruling that undid it last March.
"It is a local income tax," said state Senator Scott Beason, a Republican who last year blocked legislation restoring the tax. "I can find very few people who are fond of it."
But county officials, including County Commission President David Carrington, said the tax was vital to curing revenue gaps, such as one threatening the current $217 million budget, and working out a deal with creditors in the bankruptcy case.
Without a replacement for occupational tax revenue, Jefferson County faces more steep cuts in all departments, including courts, police and senior services, according to a memorandum sent by the county commissioners to state legislators.
"We are going to have people running in the streets if we don't get it fixed," County Commissioner Sandra Little Brown said in an interview.
To do that, Jefferson County must turn to state government. In Alabama, the state holds unusually strong power over local government finances, thanks to a 1901 state constitution that reserves authority over taxes to the state legislature.
Republican Governor Robert Bentley made no mention of the occupational tax or Jefferson County's bankruptcy case on February 7 in an agenda-setting speech to the state legislature, which is controlled by his party.
While Jefferson County's commissioners desperately want the tax restored, state legislators from the area are divided.
Beason, the senator who blocked the occupational tax legislation, said Jefferson County's leaders can cut further.
"They probably don't have enough money to run the county the way it has always been run," Beason said. "But they do have enough to run it the way it should be run."
To make up for the lost revenue, Jefferson County officials have said they may need to eliminate another 100 jobs and shut down county agencies for the elderly and land development.
"If somebody tells me we can pass taxes in a Republican house, I have a snowball to sell them in Florida," said Representative John Rogers, a Democrat and head of the Black Caucus, who sponsored last year's failed occupational tax bill.
The county also wants the legislature to give it more flexibility over its budget by removing so-called earmarks, which dedicate revenue to fixed purposes. About 44 percent of the county's budget is covered by earmarks.
Local legislators who are Democrats defend some earmarks, such as $40 million of the Jefferson County budget set aside for the county-run Cooper Green Mercy Hospital in Birmingham.
Cooper Green employs more than 600 people to serve on average 40 hospital patients, wasting resources, according to conservatives. But Democrats such as Rogers refuse to budge on the earmark and argue the hospital is vital to Birmingham, where U.S. Census data shows one of every four people is poor.
In last year's session, Rogers killed Beason's earmark removal bill and Beason killed Rogers' occupational tax bill, a standoff that reflected not simply the even split of Democrats and Republicans among the region's 18 state senators and representatives.
Feeding the divide in the region's legislative delegation, which has gatekeeper power over the taxing laws Jefferson County wants, is that many of the lawmakers represent more than just Jefferson County.
The nine Democrats in the delegation all represent areas solely within Jefferson County, but most of the Republican legislators have districts with non-Jefferson areas where the tax is unpopular. One such non-Jefferson area is Shelby County, where the median household income is more than one-third higher than that of Jefferson County.
"It nullifies our delegation," said Rogers.
People on the courthouse car-tag line used words such as unfair, ridiculous and aggravating to describe Jefferson County's diminished services and frequently blamed the situation on state legislators and past county policymakers, including some now in prison for corruption crimes.
"My line was two hours, and I certainly cannot hold it against the employees," said Tom Hagood, a carpenter. "They sent a pretty runner down the line to interview people and check to see if their papers were in order ... Any blame for the long lines and inconvenience would be better directed at the politicians."
(Additional reporting by Melinda Dickinson in Birmingham; Editing by Steve Orlofsky)