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The Honolulu Advertiser

Posted on: Tuesday, July 13, 2004

State revenue exceeds forecast by $98 million

By Gordon Y.K. Pang
Advertiser Capitol Bureau

The state collected about $98 million more in taxes last fiscal year than was forecast by the Council on Revenues, but Gov. Linda Lingle and her administration say they will stay the course with restrictions imposed on the state's $3.6 billion general fund budget.

Tax revenues

The state Tax Department yesterday released these numbers on revenues from the fiscal year that ended June 30, compared with the previous fiscal year:

• General excise and use taxes: The general fund's largest source of income increased 6 percent from $1.79 billion to $1.9 billion.

• Individual income tax revenues: Increased 12.5 percent from $1.04 billion to $1.17 billion.

• Corporate income taxes: Rose 586 percent, from $8.3 million to $56.7 million.

A strong economy keyed an 8.3 percent increase in revenues in fiscal 2004 over the previous year, according to preliminary figures released by the Department of Taxation yesterday. The fiscal year ended June 30.

The $3.45 billion in tax revenues is not only higher than the $3.18 billion collected in 2003, but is about 3 percentage points, or about $97.8 million, higher than the $3.35 billion that was forecast by the state Council on Revenues. The state bases its budget on the council's revenue forecasts.

The rosier revenue picture "doesn't erase the deficit" of $150 million to $160 million in the upcoming 2006-2007 biennium caused by increases in government employee retirement benefits, debt service and recently negotiated pay raises for workers, said Budget Director Georgina Kawamura. "We're not going out and spend, spend, spend."

Lingle last month called on all state agencies to reduce their non-fixed costs by 1 percent. Among other things, she also reduced support for the state Foundation on Culture and the Arts by about $500,000 and restricted, at least for now, about $2 million in legislative grants-in-aid to various nonprofit agencies.

"We're facing a $160 million deficit in the next two years and this will help us to reduce that clearly," Lingle said. "But it doesn't mean that we have a lot of extra money to spend. I want to caution everyone that it's a great sign, it means the economy is in recovery, it means the tax department is doing a great job, we got the changes to (Act 221 high technology tax credits) that we needed. But it's not a signal to go out and start spending a lot of new money."

Senate Ways and Means Chairman Brian Taniguchi, D-10th (Manoa, McCully), called the higher tax revenues "good news." He urged Lingle to lift some of the budget restrictions.

"I believe it takes away from the governor's argument that there's not enough money and I hope that she would reconsider restricting some of the monies that were appropriated for some of the nonprofits," Taniguchi said. "Everything in the budget should be OK and then you have on top of that $90 million that may help her in the upcoming biennium budget."

Lingle said her administration would consider loosening restrictions in areas related to health and safety on an individual basis, "but in general we're going to wait and see the September Council on Revenues."

When the Council on Revenues meets in September, it will evaluate its revenue forecasts for the 2005 and 2006 tax years. The most recent council forecast calls for a 7.9 percent increase in 2005 and 5.3 percent growth in 2006.

In addition to attributing the higher revenue collections in part to the tightening of requirements for high-technology tax credits, Lingle credited the phasing out of the residential construction and remodeling tax credit.

Act 221 tax credits were designed to encourage investment in technology-related companies. While credited with creating 600 technology jobs in 2002, some of the credits were used to write off millions of dollars put into projects such as movie and TV productions that did not create permanent jobs.

The state also had a 4 percent tax credit for renovations and home construction, enacted shortly after the Sept. 11 attacks and which expired last summer, for those who completed their remodeling and paid for it by the end of June 2003.

Lowell Kalapa, president of the nonprofit Tax Foundation of Hawai'i, said that besides an improving economy spurred by a strong visitor industry, he believes "a lot of people shied away from claiming tax credits" because of a fear of being audited.

The state may also be holding off on handing out the credits because they are being audited, Kalapa said. "So naturally, it's not out the door, it's counted."

Last month, tax officials acknowledged that they are questioning whether they should grant about $20 million of $60 million in Act 221 high-technology tax credits claimed in 2001 and 2002.

Paul Brewbaker, chief economist for Bank of Hawaii and a former member of the council, said the revenue numbers appear to be as rosy as he had forecast.

He said, however, that he is somewhat puzzled why corporate income taxes remain so low, something he believes is being caused by the effects of Act 221 and other business tax credits.

Mike Sklarz, who chairs the Council on Revenues, said the revenue figures confirm "how well the economy is doing and things that we felt anecdotally all along."

Council members were perplexed midway through the year by monthly numbers "that seemed to be lagging, but sure enough they've come through like gangbusters as we got through June," Sklarz said.

June revenues were up 12 percent over the same month a year ago. May 2004 numbers, meanwhile, were up 10.1 percent over May 2003.

Advertiser reporter Lynda Arakawa contributed to this report. Reach Gordon Y.K. Pang at gpang@honoluluadvertiser.com or at 525-8070.