Posted on: Saturday, May 17, 2003
State told to expect $73 million less in revenue
By Gordon Y.K. Pang and Lynda Arakawa
Advertiser Capitol Bureau
State budget analysts will need to find an estimated $73 million more to balance the budget the rest of this fiscal year, and about $70 million in the upcoming two years, under forecasts agreed to by the state Council on Revenues yesterday.
The council's latest projections call for a 1.8 percent increase in revenues the current year, which ends June 30, over last year, a significant drop from the 4.3 percent growth it had projected in March.
Staff from the Department of Taxation, which provides data and analysis for the council, said the lower forecast can be attributed to a higher number of people than expected taking advantage of tax credits and a recently enacted law that allows them to defer a larger share of their tax payments until next year.
The drop for the current fiscal year was not as dramatic as had been predicted earlier in the week, however. On Monday, the department released its monthly date for April that indicated the drop in revenue would be closer to $100 million, and that the growth rate would be reduced to about 0.7 percent. But tax officials said yesterday that income tax revenues appeared to be coming in higher during the first part of May.
While assigning about $37 million of the $73 million difference on unanticipated tax credits, tax officials did not specify from where among about a dozen different credit categories they believe the changes came.
There was clear dissension among the council members on whether the estimates for the tax credits are correct. Council member Vito Galati said he was uncomfortable issuing projections that blamed tax credits for the decrease in anticipated revenues because he felt uncertain about the assumptions used by the tax department.
Other council members, however, said they believed that the details should be included in the forecast so the public can see how they came up with their bottom-line numbers.
Council Chairman Mike Sklarz said he will urge Tax Director Kurt Kawafuchi for more resources to better analyze the impacts of Act 221 high-tech tax credits, the home remodeling credit and other tax credits. "Obviously, we will need to wrestle with it in the next few years," Sklarz said.
The remaining $36 million, tax officials said, is the result of Act 190, which reduces the percentages used to determine the required annual payment on estimated income taxes from 90 percent to 60 percent of the tax due. The $36 million difference would then show up in next year's budget.
The council also voted to revise its projections for revenue growth downward for the upcoming two fiscal years downward — by $38 million in 2004 and $32 million in 2005 — from its March forecast. The growth rate projections of 7.7 percent and 6.3 percent are actually higher than the March numbers, an irregularity attributed to the lowering of the current year's base by $73 million.
Reaction from the state Capitol was mixed.
While the projections are better than expected, "they are still significantly lower than the council's March projections for this year and the biennium," Lingle said in a prepared release. "We still face some tough decisions on the budget, and will discuss the appropriate course of action with our directors and legislators to ensure that core functions and public safety are maintained." She said there will not be a need for a special session.
House Speaker Calvin Say, D-20th (St. Louis Heights, Palolo, Wilhelmina Rise), said he was optimistic that state tax revenues would exceed the expectations of the Council on Revenues and wind up at around 2.5 percent growth. Say suggested the governor could tap the Hawai'i Hurricane Relief Fund to make up the shortfall rather than defer state payments — which Lingle said she would do — or make more budget cuts and restrictions.
Lingle has maintained she does not want to use the Hurricane Relief Fund, and Senate President Robert Bunda also said the Senate is opposed to tapping the fund.
"Gov. Lingle has a considerable amount of authority to restrict and cut spending over the next six months, giving time for tax revenues to pick up," said Bunda, D-22nd (North Shore, Wahiawa), in a statement.
"When the Legislature convenes next January, we can then revisit a number of tax issues that would help improve the state treasury — I'm talking about tax credits in general, Act 221 reform, stopping the proliferation of special and revolving funds, and other measures we've considered but never passed," Bunda said. "While there is some evidence of the economic benefits of tax credits, there's also no question that these overly generous incentives are having a disproportionate impact on revenue collections."
Lingle and the administration had, up until earlier this week, suggested that Act 221 was a significant factor for the recent $73 million drop in projected revenues, but whether that's true remained unclear yesterday. However, the numbers unveiled by the tax department do forecast increasingly larger impacts in future years.
Adding up the five categories that make up the tax credit show people claimed about $21.8 million in 2002. The latest forecast for 2003 calls for that figure to more than double to $48.4 million in 2003, and then increase to $64.7 million in 2004 and $76.7 million in 2005.
House Economic Development Chairman Brian Schatz, D-25th (Makiki, Tantalus), who has opposed reforms to Act 221 as proposed by Lingle, said that the numbers are still projections and that he remains skeptical the impacts will be as great as forecast.
