Worst fears stymie session
By Kevin Dayton
Advertiser Capitol Bureau Chief
Lawmakers are afraid that state government may be sinking into the worst financial crisis in its history, and those fears undermined plans for any dramatic action the Legislature might have taken in the special session that closes this week.
Advertiser library photo • April 4, 2001
The state's biggest sources of income are excise taxes and income taxes, and it is obvious the tourism slump that followed the Sept. 11 terrorist attacks will slow the flow from both sources.
Gov. Ben Cayetano said he doesn't expect the revenue report to be good.
Tourists who don't come to Hawai'i won't pay excise taxes. Workers who have been laid off or lost a second job don't pay as much in income taxes and don't buy big-ticket items. The only question now is how much of a hit the state treasury will take.
Alarm at the possibility of a new budget crisis prompted lawmakers to largely ignore Gov. Ben Cayetano's plan to spend
$1 billion on public construction projects that would create jobs and theoretically keep the economy from sliding into recession. Legislators chopped the plan to $100 million, with most going to pay for small-scale repair and maintenance projects on public buildings.
Anxiety about the budget also headed off any serious consideration of new tax cuts, an approach embraced by President Bush and Congress as a way to stimulate the national economy.
Cayetano withdrew his own plan for cutting capital gains taxes before the session started, and Republicans couldn't interest the Democrats in their proposals to temporarily eliminate the excise tax on food, or to establish "tax holidays" when shoppers would not be charged the state excise tax.
The most significant tax measure that is advancing would provide tax credits to developers, hotel operators and homeowners to encourage them to build or renovate. Lawmakers contend any tax revenue lost is worth it because those construction projects will create jobs that generate income taxes and other revenue for the state.
Lawmakers won't have official estimates of damage to the state budget until a panel of economists called the state Council on Revenues meets in mid-November. Most don't want to speculate.
Last year, the state collected nearly $3.16 billion in taxes, and lawmakers assumed those collections would grow by about 5 percent when they drafted the budget for this 2001-02.
With unemployment rising and hotel occupancy and retail sales down sharply, those estimates now seem impossibly optimistic.
If the state merely collects as much in taxes as it did last year — and some lawmakers believe even that might be too much to expect — the state will have about $158 million less to spend than expected. Since Cayetano and lawmakers had planned to spend that money, budget cuts would be required.
House Speaker Calvin Say guessed last week that tax collections will decline by 1 percent this year, which would mean the state would have about $190 million less than expected. That would require even deeper budget cuts.
By comparison, the infamous 1995 budget shortfall that Gov. Ben Cayetano inherited when he came to office amounted to $350 million over two years. To cope with that calamity — which Cayetano described as the worst financial crisis in state history — the governor restricted spending by most state departments, froze hiring and laid off some state workers.
An indirect indication of the potential scope of the state's budget problems cropped up last week when Hawai'i Visitors & Conventions Bureau chief executive Tony Vericella outlined the goals of the state's new $20 million tourism promotion blitz.
Vericella said the campaign is aimed at getting "stable" visitor arrival numbers by mid-2002, which means arrivals in June 2002 would be equal to arrivals last June.
That's significant because state Budget Director Neal Miyahira said the Cayetano administration is watching arrivals closely to gauge how the state economy is doing. If Vericella hits his targets, the state will see arrivals pick up to last year's levels at the end of this fiscal year, a scenario that virtually guarantees state tax collections this year will lag well behind last year.
Miyahira has looked at several scenarios to estimate the impact from each, but refused to be more specific. "Right now, everybody's guessing, taking their best educated guess," he said.
For his part, Cayetano said last week he doesn't expect good news when the council meets.
"I expect that it will be down," he said. "I don't see how it can be up or even level. And then we'll make the adjustment accordingly. But right now, I really don't want to announce that I'm going to make a 5 percent cut or any kind of cut because the way I've done it in the past there has been a lot of consternation and people get worried and upset."
However, Cayetano said he does plan to make restrictions, and said next year he will again ask lawmakers to tap a $213 million surplus in the Hawai'i Hurricane Relief Fund. Lawmakers rejected a similar request during the special session.
The hurricane money is important because "clearly we're not going to be able to make enough restrictions to government without hurting the two biggest departments that we have, the University of Hawai'i and the Department of Education," he said. "They account for 51 percent of our general fund budget and so when we make a 5 percent cut, it's almost impossible to cut 5 percent and leave those two institutions alone."
Cayetano also said he has made special efforts in the past to protect the public schools system, adding that "we hardly cut them." He suggested that this time may be different.
"This time around we need to make sure that the departments which handle social services for our people, the Department of Health and Department Human Services are not unduly hurt because this is a time when people are out of work, they will need those services," Cayetano told reporters Friday.
Reach Kevin Dayton at kdayton@honoluluadvertiser.com or 525-8070.
