Posted on: Sunday, March 21, 2004

State tax collections lagging

By Sean Hao
Advertiser Staff Writer

Lawmakers and the Lingle administration are counting on Hawai'i's growing economy to pay for a host of new programs and services ranging from a prescription drug program, battling the war on ice, paying for government raises and creating new business tax incentives.

But so far tax collections have failed to keep pace with economic growth. Last year the economy grew by an estimated 5.1 percent while tax collections were growing by about 2.5 percent.

The state Council on Revenues, which forecasts tax collections, says the problem could be faulty economic statistics or the lingering effects of the Sept. 11 attacks.

"It (2003) was still a good year," said council member Carl Bonham. "It's just not as clear that 2003 was such a rapid recovery."

The council is hoping that tax collections will begin to match the strong economic numbers this year.

"I share their hope (that will occur), if not their faith," said Paul Brewbaker, Bank of Hawaii chief economist.

Brewbaker and Lowell Kalapa, president of the nonprofit Tax Foundation of Hawai'i, maintain that a significant portion of the gap between economic growth and tax collections is due to generous tax credits offered by the state, including the Act 221 high-tech investment tax credit.

The total cost of tax credits rose from $114.4 million in fiscal 2001to $125.9 million the following year. During that period the cost of technology tax credits rose from $22 million to $35.4 million, according to the Department of Business, Economic Development and Tourism.

"There is a disconnect between the economy and the tax system and I believe to a certain degree it has occurred because of the tax credits," Kalapa said.

Couple those with a cut in the top individual income tax rate from 10 percent to 8.25 percent between 1999 and 2002, and it should come as no surprise that tax collections during the current economic expansion aren't matching those that occurred during previous booms, Brewbaker said.

The Council on Revenues recently decided to maintain its forecast that tax collections will increase 5.2 percent in the year to June 30. But in the first eight months of that year collections were running at only about 3 percent above the previous year.

The Council on Revenues also expects tax collections to rise a healthy 7.9 percent in the year to June 30, 2005.

"My concern is that, if they're wrong and (general fund collections) are growing 2 percent, brah, that's a big hole" in the state budget, Brewbaker said.

If revenues don't start to track economic growth the council's estimates may not be met and state spending will have to be reined in, Brewbaker said.

"I don't sense that they're hedging that risk," he said. "Do you know now what you cut if you have to? They're taking a naked position as we would say in the financial market."

The Council on Revenues initially blamed lower-than-expected tax collections on tax credits. That seemed to fit with an 82 percent plunge in corporate income tax collections in the year to June 30, 2003. However, recent data show that tax credit claims during the first half of that period were less than expected, Bonham said.

So the council now believes that corporations' didn't pay as much tax as expected possibly because of losses carried forward after the Sept. 11 attacks, Bonham said.

Whatever the reason, state lawmakers seem willing to go along with the council's estimates for a strong recovery in tax collections this year.

State Rep. Brian Schatz, D-25th (Makiki, Tantalus), chairman of the House economic development committee, said the impact of tax credits remains an important issue, but he doubts they will derail plans to boost state spending.

"We're in a better position to balance the budget and still meet the needs of the people than we have been in 10 years," Schatz said.

Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.