Revenue forecast predicts $150 million shortfall
By Kevin Dayton
Advertiser Capitol Bureau Chief
The state will run $150 million short in tax collections this year, forcing budget cuts, transfers from cash reserves or both.
The state Council on Revenues yesterday estimated that state tax collections would decrease by about half of 1 percent this year, the first decline since 1995.
The budget situation "doesn't look good," Gov. Ben Cayetano said last night, and he might have to send state workers on unpaid leave to trim the $3.47 billion general budget.
"It is big. It's about as big as when I first got in office — that's the irony of the whole thing," he said. "I think there are things that we can do, but I may need legislation to do it. I hate to lay people off if maybe we could just furlough or something. I need to talk to the unions as well."
On top of the gloomy estimates for the current budget, Cayetano said he believes the state will lose $150 million next year.
"It's really big money," he said. "I need to get together with the legislative leaders and just brainstorm things to see if we can come up with something. Otherwise, there's going to be drastic cuts."
The erosion in the state's tax base was blamed on business closures, unemployment and decreases in tourism, mostly related to the Sept. 11 terrorist attacks. Visitor arrivals, which picked up slightly in October, are off more than 20 percent this month, and tourism executives say they do not expect much improvement through the end of the year.
Several observers, including Democratic House Speaker Calvin Say and Senate Minority Floor Leader Fred Hemmings, said they believed the state estimate was optimistic, and that the blow would be more severe.
"I hope I'm wrong, but I think Council on Revenues numbers may be conservative," said Hemmings, R-25th (Kailua, Waimanalo). "It may be worse. What we're seeing is closing down of companies that won't be paying taxes at all."
Say, D-18th (Palolo, St. Louis, Kaimuki), and Senate President Robert Bunda, D-22nd (Wahiawa, Waialua, Sunset Beach) already have suggested that Cayetano reduce spending by all state departments by 5 percent.
Say said the state also might look to its cash reserves to help offset the shortfall. It ended the last fiscal year with a cash balance of about $349 million, although the administration expects those reserves to be tapped for negotiated raises to teachers and other public workers.
There is also some $213 million in the Hawai'i Hurricane Relief Fund that lawmakers might be able to use. Some have argued that should be returned to homeowners, who paid the state for hurricane insurance, not to establish a rainy day fund.
If the community is not willing to allow that money to be used to make up for revenue losses, Bunda said, Cayetano and the Legislature will impose cuts.
Either way, Bunda does not expect state workers to be fired. "Not anytime soon. Not that I see."
Hemmings called the budget squeeze "a blessing in disguise. It's going to force the state to do what we should have done a long time ago," such as cut the state budget and reduce the state payroll through attrition.
But he does not believe the state will need to resort to layoffs, either.
The Council on Revenues is made up of economists responsible for projecting state tax collections each year. Before the Sept. 11 attacks, it had estimated an increase of about 4.1 percent in state tax collections for the year that began July 1, over the previous year.
Each percentage point drop in collections translates to about $31 million less for the state treasury, meaning the state is now expected to collect $148.8 million less than previously projected.
Council Chairman Michael Sklarz said the upheaval in the tourism industry is putting a relatively modest dent in state tax collections, because other parts of the economy are still healthy.
"Less than a 1 percent decline with such a severe drop in tourism is really kind of remarkable — but it's also testament that our economy is really much bigger than the visitor industry," Sklarz said. He cited work by Hawai'i economists that suggests the tourist industry makes up about 20 percent to 25 percent of the state economy.
The revenue projection assumes visitor arrivals will drop by about 13 percent this year and bounce back to an increase of about 13 percent next year.
As visitor arrivals recover, the council expects tax collections to rebound: It projected growth of 4.6 percent to 5.1 percent in each of the next four fiscal years.
Say was especially critical of the 5.1 percent growth projection for next year.
"Come on, that's not being realistic," he said. Say argued that the state should be conservative and assume tax collections will decrease slightly next year.
Reach Kevin Dayton at kdayton@honoluluadvertiser.com or 525-8070.
