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The Honolulu Advertiser
Posted on: Friday, March 12, 2010

Hawaii's revenue expectations for next year get lowered


By Derrick DePledge
Advertiser Government Writer

The state Council on Revenues delivered mixed news yesterday: No need for any more state budget cuts to get through the fiscal year that ends in June, but the state will have to find more money to stay out of the red next year.

Economists on the council believe the state is recovering from a recession. The question is how soon, and how high, tax revenue will rebound.

The council kept its forecast of a 2.5 percent decline in tax revenue for the fiscal year that closes in June.

But the council scaled back its prediction for the new fiscal year that starts in July, projecting a 6 percent revenue increase instead of 7.6 percent growth.

The reduced forecast adds another $48 million to the state's $1.2 billion budget deficit through June 2011.

The state House passed a $10 billion budget draft this week that came in $41.2 million less than Gov. Linda Lingle requested. The House also moved several tax and revenue-generating bills as options to close the deficit.

The state Senate, which is drafting its version of the budget, will now have to find the extra $48 million.

"I think I'm going to spend this weekend turning over some more rocks, looking for more money," said state Sen. Donna Mercado Kim, D-14th (Hālawa, Moanalua, Kamehameha Heights), the chairwoman of the Senate Ways and Means Committee.

Mercado Kim said she is not inclined to make additional cuts to social-service programs and public education. She also said she would likely consider reductions to non-core functions at the state Department of Education rather than the cuts the House made to the department's weighted student formula, which would increase class size.

Mercado Kim, like House leaders, will probably look at transfers from special funds, a barrel tax hike on oil products, and reducing or eliminating tax credits and exemptions to generate new revenue rather than increasing the state's general-excise tax.

She also warned she has not ruled out scooping hotel-room tax revenue from the counties. The House agreed to cap hotel-room tax revenue that goes to counties for five years rather than take all of the money about $100 million a year to help with the deficit.

County mayors have cautioned that the loss of hotel-room tax revenue would likely mean property tax increases for residents.

"The county TAT (transient accommodations tax) is still on the table as far as I'm concerned," she said.

FAVORABLE SIGNS

Economists on the Council on Revenues are optimistic about positive signs on tourism, the housing market and unemployment.

The council's forecasts, by law, are used to guide the governor and lawmakers when drafting the budget.

The council warned that its forecast does not reflect Lingle's decision to delay $275 million in state income tax refunds from April until July to manage through this fiscal year.

The delay in tax refunds inflates tax revenue this fiscal year, and would deflate revenue next fiscal year unless the next governor agrees to continue the policy.

"The actual numbers may vary substantially as a result of a change in the timing of refunds," said Paul Brewbaker, an economist and the council's chairman.

For example, without the delay in tax refunds, the state Department of Taxation reports that revenue would be off 3.5 percent through the first eight months of the fiscal year, instead of 1.4 percent.

Lingle's financial plan presumes that tax refunds will be delayed in upcoming fiscal years, pushing the payments forward until the economy fully recovers.

'KICK THE CAN'

Jack Suyderhoud, a business economics professor at the University of Hawai'i-Mānoa who serves on the council, said the idea is to "kick the can down the road and hope that the road gets better."

State Rep. Marcus Oshiro, D-39th (Wahiawā), the chairman of the House Finance Committee, said lawmakers are considering a bill that would force the next governor to make a decision about the tax refunds by only allowing the accounting maneuver for one more fiscal year.

"We're looking at a bill to see whether or not that is the right policy for Hawai'i, whether or not we should be collecting our taxes on time, but paying (refunds) later, much later," he said.

Lingle, in a statement, said the council's stable forecast is a reflection of her administration's efforts to contain state spending during the recession.

"The council's projections also reflect promising signs that the economy is starting to stabilize," the governor said. "The visitor industry outlook in particular is expected to improve due to increased air seats, aggressive marketing campaigns and improving global economic conditions.

"While there is reason to be optimistic, we also need to be realistic and accept the fact that actual revenues are still significantly lower than earlier projected, and it will take several years before general-fund revenues return to pre-recession levels."