Aid to education, prison overcrowding, insurance reform, property tax relief and the environment are among the issues challenging state lawmakers this year, but none looms as large as the battle of the budget.

It's income vs. spending, and if revenues are up, so are costs of services. Just to stay even is more expensive, without talking about adding money for things like schools, road repair or social services.Some states, including Alaska, California, Connecticut, Iowa, Louisiana, Massachusetts, Montana, New York and West Virginia, are running in the red or face deficits in the coming fiscal year. Others, like Illinois, have avoided deficits by no-frills budgets and face a backlash from the lean years.

A lucky few are running surpluses, heating up debate on what to do with the largesse.

Caution abounds. New York and Massachusetts saw surpluses of a few years ago turn to deficits - at least $636 million in Massachusetts' current $11.6 billion budget and more than $1 billion in New York's budget of more than $28 billion.

States expecting to do well this year - Hawaii, Kansas, Minnesota, Nevada, Oregon, Utah, Virginia, Idaho and Maryland - are fearful of the same thing happening to them.

"It's real easy to make a tax cut right now, and we all look good for re-election," says Hawaii House Finance Committee Chairman Joseph Souki. "But is that the wisest thing?"

Lawmakers, having read voters' lips, are loath to talk about hiking taxes. The idea is being mentioned mainly in the states with the biggest money woes, and the most likely candidates are increased taxes on cigarettes, alcohol and gasoline, rather than raising state income taxes.

Spending on education has perhaps the highest priority. Even in West Virginia, with a fiscal headache totaling $680 million, Gov.-elect Gaston Caperton has promised unspecified raises to the state's teachers, who rank 46th in salaries.

Prisons are another big-ticket item. Michigan is in the middle of a massive prison building program; by 1991, the state will have spent $900 million to build 28 prisons, and if projections hold true, the system still will be overcrowded.

Once lawmakers have their budget priorities settled, they still won't lack for issues.

Rising auto insurance costs are expected to be debated in New Jersey, Pennsylvania and South Carolina. And California is awaiting the results of a court challenge to Proposition 103, a voter initiative passed last November that requires a 20 percent rate rollback for most kinds of insurance and tougher state regulation of insurers.