The Lingle administration yesterday suggested several options to close the state's budget deficit, including salary and benefit cuts for state workers, higher taxes on cigarettes and alcohol, and transferring money from Honolulu's rail transit tax to the state's general fund.

The administration also raised the possibility of furloughs for state workers, deeper cuts to state departments, transferring money from the state's hurricane relief fund, and repealing the high-technology tax credits known as Act 221.

Georgina Kawamura, the state's budget director, cautioned lawmakers on the state Senate Ways and Means Committee and the state House Finance Committee that Gov. Linda Lingle had not made a commitment to any of the proposals.

"We see this list as a means to have this open discussion and continue our collaboration in assessing all viable options," she said.

The options are for the two-year budget that lawmakers will draft this session. Kawamura said the state is now projecting deficits of $315.4 million in fiscal year 2010 and $549.8 million in fiscal year 2011.

Kawamura also explained yesterday how the administration will likely fill the immediate budget gap for the 2009 fiscal year that ends in June. Lingle had made $221 million in spending restrictions and had asked lawmakers to transfer $40 million from the state's rainy day fund to get through the fiscal year.

But Kawamura's latest estimates, based on the downgraded forecast from the state Council on Revenues earlier this month, shows the state is still $118 million short in revenue and would have a deficit of $75.6 million at the end of June if new steps are not taken.

Kawamura said the state is banking on $31 million in additional Medicaid reimbursement payments from the federal government and said Lingle would likely ask lawmakers next week to take more money from the rainy day fund to make up the shortfall. If that happens, it would mean the governor's proposal to take money from the rainy day fund to narrow the deficit in 2010, as she had planned, would be limited.

Some lawmakers were frustrated the Republican governor did not make specific proposals to close the deficit and instead appeared to leave it up to them to choose among several politically unattractive options.

"We said (to the administration), we need you folks to come out. We need to send a message out to the people of how bad things are and that it's serious," said state Sen. Donna Mercado Kim, D-14th (Halawa, Moanalua, Kamehameha Heights), the chairwoman of the Senate Ways and Means Committee.

State Senate Minority Leader Fred Hemmings, R-25th (Kailua, Waimanalo, Hawai'i Kai), a Lingle ally, said the administration needs to be more assertive. "It's nice to have a smorgasbord, but we're on a diet here," he said. "We need to know what they want on the menu."

MULLING OPTIONS

Kawamura said that if the administration were to consider tax hikes, then the preferred option would be increasing so-called "sin taxes" on cigarettes and alcohol.

The administration suggested that transferring one year's proceeds from the rail transit tax would bring in $165.3 million in revenue to the general fund. The state would extend the 15-year surcharge for an additional year to make up for the transfer.

Earlier yesterday, in opening day speeches on the first day of the legislative session, state House and Senate leaders described the budget deficit as among the most serious challenges ever facing the state.

State Senate President Colleen Hanabusa, D-21st (Nanakuli, Makaha), said, "These are the times when we show the people what we are made of. These are the times when we ask the hard question of what the role of government is. These are the times what we must say what we can do and what we will do."

While Senate Democrats will release more details on their majority package in the coming days, Hanabusa talked about potentially redefining the eligibility requirements for unemployment insurance and extending unemployment benefits. She discussed joining with other states to capture tax revenue lost from Internet sales. She also said potential cuts to executive, judicial and legislative salaries, legalized gambling, and deferring the rail transit tax for a year as a tax relief option should be on the table for debate.

State Sen. Sam Slom, R-8th (Kahala, Hawai'i Kai), said many in the news media have described the economic backdrop of the session as gloomy but he said Republicans would approach it as an opportunity.

"We need to get back to work, stop whining, not look for government handouts, and be more productive and creative," Slom said. "Successful businesses do just that, they reinvent themselves for changing times."

Slom said Republicans would oppose new tax increases and legalized gambling. He said lawmakers should not accept pay raises. He also said the state should not continue to raid special funds but instead consider whether the funds should be abolished.

CHALLENGES AHEAD

In the House, state House Speaker Calvin Say, D-20th (St. Louis Heights, Palolo Valley, Wilhelmina Rise), said lawmakers will be measured by how they react to the economic challenge.

"We are facing a budget crisis unmatched in my 32 years in the House," Say said.

Say said lawmakers should consider reforming the general-excise tax system by repealing exemptions and then using the savings to reduce the current 4 percent rate statewide. (The rate is higher in Honolulu because of the rail transit surcharge.) He also said lawmakers should think about repealing income tax deductions and credits and then decreasing tax rates for lower- and middle-income taxpayers.

While the Lingle administration mentioned the possible repeal of Act 221 as an option to close the deficit, state House Minority Leader Rep. Lynn Finnegan, R-32nd, (Lower Pearlridge, 'Aiea, Halawa), embraced the high-tech tax credits as an incentive for venture capitalists to invest money in Hawai'i.

"Capital investment is shrewd, and will go where it has the best potential with the least risk. I believe that not extending Act 221 will equate to the loss of good-paying jobs for our people and work against diversifying our economy," Finnegan said. "Act 221 attracts the international and local investor and high technology companies that could take their money or ideas anywhere on the globe and gets them to say, 'Let's try Hawai'i.' "