The state Senate agreed yesterday to resurrect a tax exemption on ethanol-blended gasoline, sending it into conference committee with the state House, where lawmakers said it was possible, but not likely, it will pass.

The general-excise tax exemption expired at the end of last year, costing consumers about 11 cents a gallon in higher gasoline prices.

The Senate and House held lengthy sessions yesterday to prepare for a procedural deadline tomorrow — known as second crossover — to exchange bills between chambers before final negotiations begin in conference.

Lawmakers moved bills on the state budget, restoring health-insurance rate regulation, a tax break on food, and empowering regional affiliates within the state's public-hospital system, among dozens of others.

Gov. Linda Lingle and several state lawmakers had wanted the tax exemption on ethanol-blended gasoline restored, but some lawmakers say it could cost the state $35 million to $40 million in revenue and warn there is no guarantee the gasoline industry would pass the savings on to consumers.

The Senate also agreed to a 1-cent-a-gallon increase in the gasoline license tax that would generate about $14 million for the state's highway fund.

State Sen. Ron Menor, D-17th (Mililani, Waipi'o), said the moves were "part of an ongoing effort to provide relief to consumers from high gas prices in Hawai'i."

State House Majority Leader Kirk Caldwell, D-24th (Manoa), said he was pleased the debate would go to conference and said it was possible lawmakers could come to an agreement. "But, right now, I wouldn't bet on it," he said.

HMSA TARGETED

In a House session that ran into the evening, lawmakers agreed to a bill that would reinstate health-insurance rate regulation for three years but would essentially only cover the Hawai'i Medical Service Association, the state's largest insurer. Some lawmakers had considered proposing an amendment to cover Kaiser Permanente and others, but ultimately decided to send the bill to conference in its current form.

"We should be making all insurance companies the same," said state House Minority Leader Lynn Finnegan, R-32nd (Lower Pearlridge, 'Aiea, Halawa), who wanted the bill expanded.

Many controversial bills remain alive for discussion, such as one that would force stricter tax enforcement on vacation rentals and bed and breakfasts and crack down on illegally run operations.

Drug testing for public-school teachers is also still on the table as lawmakers try to find a constitutional and palatable way to order the tests when there is reasonable suspicion teachers are using drugs. A separate proposal would require state elected officials to submit to drug testing.

The House pushed until tomorrow votes on a bill that would give psychologists limited authority to prescribe certain medications, as well as one that would establish a new felony offense for intentional cruelty to animals.

In addition, the House and Senate will also vote tomorrow on bills that were amended on the floor yesterday, such as the ethanol tax exemption and empowering regional affiliates in the public-hospital system.

House Democrats defeated a floor amendment by Republicans yesterday that would have increased the standard income tax deduction instead of providing a sliding tax credit on food based on taxpayer income.

State House Rep. Marcus Oshiro, D-39th (Wahiawa), the chairman of the House Finance Committee, said lawmakers increased the standard deduction last session and are looking at other tax relief, including the food credit, this session. He said lawmakers are still balancing spending requests and do not know the full amount of new public-worker union contracts.

Lawmakers are also required by the state Constitution to grant a tax refund because of two consecutive years when the surplus exceeded expected revenue by 5 percent. A refund could range from $1 to $50, lawmakers have said, lower than the $100 for most taxpayers recommended by Lingle and the Republicans.

"At the end of the day, the Legislature will have to make some tough choices to balance the budget," Oshiro said.

$20.8 BILLION BUDGET

The House passed a floor amendment that enhances regional affiliates within the Hawai'i Health Systems Corp. but would keep the umbrella system of state hospitals intact. Some lawmakers want to carve out a Maui affiliate to provide more local control on Maui, and the issue will likely be the focus of the conference with the Senate.

In the Senate yesterday, senators approved their version of the state budget, which provides $10.3 billion in general fund spending in fiscal year 2008 and $10.5 billion in 2009.

State Sen. Rosalyn Baker, D-5th (W. Maui, S. Maui), the chairwoman of the Senate Ways and Means Committee, said 27 percent of new spending is for health and human services, while 53 percent is targeted toward lower and higher education.

Baker noted that economists have warned the state's economy is slowing and that inflation is eating up much of the revenue growth. She described the Senate's spending proposal as a "fiscally prudent, sustainable budget."

Senators also defeated a floor amendment that would have allowed bars and nightclubs to apply for a smoking license under state liquor law. Activists opposed to the new smoking ban that took effect last November have said that bars and nightclubs should be able to choose whether to let patrons smoke.

'CREATING CRIMINALS'

State Sen. Sam Slom, R-8th (Kahala, Hawai'i Kai), said some establishments have lost business because of the smoking restrictions. Others have provided ashtrays to patrons with the warning that smoking inside is against the law.

"We are creating criminals out of law-abiding citizens," Slom said.

Baker, one of the advocates of the smoking restrictions, said a recent poll for the Coalition for a Tobacco-Free Hawai'i found that most people interviewed favored the new law. "There can be no denial that secondhand smoke is as bad as smoking itself," she said.

Most bills on the House agenda made it out of the chamber yesterday, but lawmakers shelved one that would have allowed the University of Hawai'i to use money from the state's tobacco settlement fund to pay for operating expenses and debt service for its medical school facility. While supported by the UH John A. Burns School of Medicine, the measure had been opposed by the state Department of Health and the Coalition for a Tobacco-Free Hawai'i.

Reach Derrick DePledge at ddepledge@honoluluadvertiser.com and Treena Shapiro at tshapiro@honoluluadvertiser.com.