State lawmakers, who heard more bad news about state revenues yesterday, moved toward a combination of spending cuts and tax increases to balance the state budget over the next two years.

The state Senate approved its draft of the budget and House and Senate lawmakers advanced several other bills that would raise taxes and siphon revenue from counties, tax credits and special funds to stitch together a financial plan.

The state Department of Taxation reported yesterday that state revenues are off 6.3 percent through the first nine months of the fiscal year, which is worse than the 5 percent decline projected by the state Council on Revenues. The council will update its forecast in late May, after the legislative session ends, so lawmakers who will meet in conference committee on the budget over the next few weeks will have to make an educated guess on how much revenue they have to work with over the two-year budget cycle.

"The time for tough choices is upon us," state Sen. Donna Mercado Kim, D-14th (Halawa, Moanalua, Kamehameha Heights), the chairwoman of the Senate Ways and Means Committee, told senators. "I urge you to join me in supporting the product of our shared efforts to shape a responsible expenditure plan that enhances government efficiency and minimizes impacts to vital state services."

DEADLINE LOOMS

Lawmakers prepared the budget and other bills for the second exchange between the chambers tomorrow, a significant deadline in the session. House and Senate negotiators will then meet in conference committee to work through their differences and come up with final versions of bills to send to Gov. Linda Lingle before adjourning in early May.

The budget, given the $2 billion decline in estimated state revenues over the past year and the nation's recession, is dwarfing almost all other action.

Both Senate and House budget drafts contain spending cuts to state departments and programs and targeted reductions to the state's workforce, either through eliminating vacant positions and surgical layoffs (in the Senate version) or by removing 374 state jobs and three state programs (in the House version).

But lawmakers would also use tax increases and other revenue-generating methods to balance the budget and have left themselves several options for conference committee.

"We're going to have to suck it up and tighten our belts a little bit more," said state Rep. Marcus Oshiro, D-39th (Wahiawa), the chairman of the House Finance Committee.

"I think it's time to fish or cut bait on some of the proposals with the budget and the bills."

TAX HIKE PROPOSALS

Oshiro predicted lawmakers would agree on tax increases. "At the end of the day, after making all of the hard cuts. It would be hard not to," he said.

Among the options are an increase in state income taxes on higher-income residents, diverting hotel-room taxes from the counties, paring tax credits for businesses and investors, and shifting money from a variety of special funds. Lawmakers have also kept alive a potential hike in hotel-room taxes and tax increases on cigarettes and other tobacco products.

Recognizing that diverting hotel-room taxes from counties could lead to budget gaps at the county level, lawmakers also moved bills that would allow counties to add a local surcharge to the hotel-room tax or establish a retail sales tax to help make up for the lost revenue.

Kim also said lawmakers might have to turn to the hurricane relief fund if the state's financial condition worsens, a scenario Lingle has also said was possible despite her past opposition to taking the hurricane money.

PARTY DIFFERENCES

Lawmakers, anticipating state workers may have their wages and benefits cut in collective bargaining negotiations with the state, are moving toward a salary freeze and a 5 percent pay cut through 2011 for the governor, lieutenant governor, department directors, judges and state lawmakers.

Lingle has asked lawmakers to assume $278 million in labor savings and to avoid tax increases and layoffs to balance the budget. But lawmakers have not accepted the labor savings, believing her figure is premature, and have proceeded toward tax increases and layoffs. The differences between majority Democrats and the Republican governor over the budget have grown wider during the session and could turn into a confrontation if Lingle vetoes significant portions of the lawmakers' financial plan.

House and Senate Republicans, who have little influence because of their shriveled ranks, are now speaking in unison against tax increases after some division in the House earlier this session.

State House Minority Leader Lynn Finnegan, R-32nd (Lower Pearlridge, 'Aiea, Halawa), and state Rep. Kymberly Pine, R-43rd ('Ewa Beach, Iroquois Point, Pu'uloa) said Republicans are focused on initiatives that protect businesses, create jobs, and eliminate or lower taxes.

"We agree with the governor that we should not be raising taxes and we should be trying to not lay off employees," Finnegan said. "We need to make sure people stay employed and we don't have more taxes that make it hard for them to stay afloat."

NON-BUDGET ITEMS

State Sen. Sam Slom, R-8th (Kahala, Hawai'i Kai), accused Democrats of class warfare with claims that tax increases would fall hardest on the wealthy. "It seems that the popular thing in our nation and our community is to try to have class warfare and say we're going to tax the rich," he said. "The problem is when most families in this community who are forced to work more than one job look around at their total gross income they find out, 'Oh, I'm the rich.' "

State Senate Majority Leader Gary Hooser, D-7th (Kaua'i, Ni'ihau), said no lawmaker looks forward to raising taxes but he believes everyone should share in the burden of balancing the budget. He said higher income taxes on the wealthy, for example, would make the state's tax system more progressive. He said Democrats are not trying to demonize the wealthy.

"We clearly count on entrepreneurs and business to build wealth, but this is a case of everyone helping and leveling the playing field somewhat," he said.

Along with the budget, the Senate also approved bills that would require large retailers to serve as recycling centers in the state's bottle and can redemption program, place aggregate caps on the Act 221 high-technology tax credits, and abolish the Hawai'i Tourism Authority in favor of a Cabinet-level state Department of Tourism.

The Senate also approved a bill that would make it easier to charge minors accused of murder as adults. The bill, known as "Karen's Law," is named for Karen Ertell, an 'Ewa Beach woman who was allegedly raped and murdered by a teenage neighbor.

In the House, lawmakers backed bills to impose a 50 percent surcharge on the gross receipts of consumer fireworks sales, require health education groups that receive state funds to provide comprehensive and medically accurate sex education, and allow a majority vote of the House and Senate to stop the state's sale of ceded lands.

The House also approved a bill containing the Lingle administration's six-year highway modernization plan. Republicans opposed the bill because it would impose tax and fee increases on drivers, and Lingle herself has said she might veto it unless it delays the tax increases until the economy improves, as she originally intended.

Lawmakers are considering structural changes to the Hawai'i Health Systems Corp., which oversees the state's financially troubled public hospitals. Lawmakers may allow public hospitals to convert to nonprofit or for-profit status to become more competitive. Senators also penciled in an additional $30 million for public hospitals in their budget draft by using hotel-room taxes diverted from counties.

The House would abolish the HHSC and fold public hospitals back into the state Department of Health, which used to oversee the hospitals before the corporation was established in 1996. Lawmakers are also debating whether to give public hospitals more flexibility to reduce services and to allow the Maui region, which includes Maui Memorial Medical Center, to break away from the rest of the system.