State $100 million short on taxes
| • | Chart: April tax revenues expected to decline |
By Lynda Arakawa and Gordon Y.K. Pang
Advertiser Capitol Bureau
The state will have to make up a shortfall of at least $100 million by June 30 to balance the state budget, Gov. Linda Lingle said yesterday.
State tax revenues for April declined by 27 percent compared to April 2002, leaving total taxes collected so far down by 0.4 percent, according to tax collection figures released by the state Tax Department yesterday.
Lingle and Tax Director Kurt Kawafuchi attributed the revenue decline to the high-tech tax credit law known as Act 221, and said this was why the Legislature should have amended it. She also blamed the tax credits for home construction and hotel remodeling.
Individual income tax collections dropped by 56.3 percent, or $68.5 million, in April compared with the same period a year ago. Corporate income tax collections also declined by 36.9 percent, or $6.1 million, from April 2002.
"What that means for us as a state is that we are spending a lot more money than we are taking in, and we can't continue to do that," Lingle said. "When Act 221 was passed by the Legislature, they never had a clear estimate of how many companies would claim the credit, or what the extent of the claims would be.
"We tried to make it clear during the legislative session that change had to be made in this law or this problem would compound itself, and we're seeing it even sooner than we had expected."
The April tax collection figures come days before the Council on Revenues is expected to lower its revenue projections. The Legislature based it two-year, $7.6 billion state budget on the council's projections of 4.3 percent revenue growth.
Kawafuchi is anticipating revenue growth of 0.7 percent for this fiscal year, which ends June 30. Each percentage point equals about $30 million.
Tax officials said part of the April decrease can be attributed to the so-called "weekend effect" because collections in April 2002 were inflated. March 2002 ended on a Sunday, pushing some March revenues into April.
Lingle said the immediate shortfall will not affect any state program or employee and repeated her promise not to lay off state workers.
She said she would handle an approximately $100 million shortfall by deferring state payments — such as to the Employees' Retirement System, employees' health fund and various construction projects — to July 1, the beginning of the next fiscal year.
She also said she is checking with the state attorney general's office whether the administration can expedite the transfer of special funds authorized by the Legislature.
Lingle acknowledged delaying payments until the next fiscal year is not a long-term solution and said tough decisions will have to be made over how to balance the budget over the next two years.
"Everything appropriated by the Legislature will not be able to be spent," she said. "So there will be a combination of some early decisions that I will have to make regarding spending, and some really intense discussion with legislators preparing for next year's legislative session."
Kawafuchi said while it is not possible to identify the exact causes of the declines in corporate income tax and the non-wage components of individual income tax revenues, the April numbers appear to support Lingle's argument that "uncapped" income tax credits are largely to blame.
Those tax credits include the 100 percent high-tech business investment income tax credit and 20 percent refundable research credit provided under Act 221, as well as the 4 percent residential construction and the 10 percent hotel remodeling tax credits.
Lingle noted while corporate and individual income tax collections declined, cumulative revenues from the general excise tax, the hotel room tax and taxes withheld from paychecks increased, indicating a healthy economy.
Cumulative corporate estimated income tax payments are down by 111 percent, or $39.4 million, through April 30 compared to the same period last year. The state has so far paid $45.9 million in corporate income tax refunds but received $41.8 million.
Cumulative individual income tax collections through April are down by nearly 10 percent, of $92.7 million.
General excise tax revenues, which is considered the state's largest economic indicator, have increased by 8.7 percent, or $118.7 million, so far this year.
Total revenues through April this year are $2.6 billion, while collections during the same period last year were $2.61 billion.
Lowell Kalapa, president of the nonprofit Tax Foundation of Hawai'i, said he agrees with the governor when she says the tax credits were overly generous and that they are a factor in the state's decline in tax revenues. It has been historically low interest rates that have spurred construction around the islands, he said, not tax credits.
"Tax credits, in and of themselves, are very dubious in achieving the goal of stimulating the economy," he said.
Lingle unsuccessfully lobbied lawmakers, particularly in the House, to change Act 221 and close what she called loopholes that resulted in an abuse of tax credits. House leaders, who had strongly backed Act 221, had said the administration overstated the revenue impact by underestimating the increased business generated by the tax credits.
President Robert Bunda, D-22nd (North Shore, Wahiawa), said he wanted to wait for the Council on Revenues' new projections but that he was not surprised by the lower corporate income tax revenues.
"The tax department has given us some hints and some heads up as to where that's headed.," he said. "It's the reason why the Senate's position was to look into Act 221."
State House leaders disagreed that those tax credits were to blame for the decrease in tax collections.
"It's unfair to single out one credit in particular to be the cause of tax revenue," said House Majority Leader Scott Saiki, D-22nd (McCully, Pawa'a). "We need to look at all the credits collectively."
He said Act 221 was designed to bring foreign investment into the state.
"We really believe that it's designed to help young people in our state, people who want to work in Hawai'i," he said. "That's where we're coming from on Act 221. It's a generational thing, and we're willing to take the risk to bring young people back to Hawai'i."
Reach Lynda Arakawa at larakawa@honoluluadvertiser.com or at 525-8070.
 |
