The seven-member panel is recommending that income tax liability be lowered by increasing the standard deduction, raising the amount of personal exemptions and expanding tax brackets.

But the commission also is making what Chairman Al Fernandes acknowledges is a controversial proposal: taxing pensions.

The proposal goes deeper into the pockets of retirees than the recommendation the panel floated before hearings in October. Originally, the commission suggested that only pensions over $60,000 would be taxed. Now, the panel urges that an entire pension be included as taxable income.

In its report to the Legislature scheduled for released today, the panel has not included a timetable for implementing its recommendations. Fernandes said that's because much of what the commission is proposing is "pretty dramatic" and the cash-strapped state government can't adopt the changes immediately because it would further lessen state revenues.

"This is more a blueprint to be followed, like a strategic plan saying here's where we would like to be," Fernandes said yesterday after his panel put the report in final form.

The meeting came as state Tax Director Ray Kamikawa announced that state general fund tax revenues for last month were down 12.7 percent, a drop of $28.4 million, when compared to the figure from November 1995.

Kamikawa said last month's slump also means that tax revenues for the first five months of the fiscal year are running 0.8 percent - or $9.7 million - behind the previous fiscal year's revenues.

Said Fernandes: "It would be probably easier to implement (the commission's recommendations) when the economy is doing well and when tax collections are high."

To lower the tax burden on isle residents, the panel is recommending that the ceiling on the state's highest income tax bracket - 10 percent - for married couples be raised from $40,000 adjusted gross income to $80,000.

The panel is also proposing that the highest individual income tax bracket not rise beyond 10 percent.

It is also recommending that more tax relief be provided by increasing the standard deduction from $1,900 to $2,600 for married couples filing jointly, from $1,650 to $2,300 for heads of households, from $1,500 to $1,560 for single taxpayers and from $950 to $1,310 for married persons filing separate returns.

The commission is also urging that the state's personal exemption be increased from $1,040 to $1,500.

Fernandes said he and fellow commissioners concluded pensions should be taxed because as Hawaii's population ages, there is the danger that a greater percentage of the population wouldn't be paying taxes.

"For me, the most important point to be made to the Legislature is that we need to look at the impact of demographics on our revenue base," Fernandes said. "If we didn't tax pensions and it turns out, for example, that 10 percent of our entire population was working and 90 percent was retired, how are we going to pay for government?

"It's like Social Security. As more and more people get on Social Security, how do you keep paying when you got less people putting in and more and more people taking out? Maybe we might not end up taxing pensions. But do we want to raise taxes 20 percent to 30 percent on those who are working?"

According to the Population Reference Bureau in Washington, D.C., Hawaii was third among states with the fastest-growing population of residents 65 or older from 1980 to 1990. It was outpaced only by Nevada, which was No. 1, and Alaska. But Nevada and Alaska also rank No. 1 and 2, respectively, for having the fastest growing population under 18 years old.

Isle retirees have not had their pensions taxed - an effort in the Legislature failed this year - because policymakers have found persuasive the argument that these are elderly people on fixed incomes who no longer work.

"The Legislature can obviously do whatever it wants to do," Fernandes said.

"But as tax people, we're saying from a pure philosophical - not social - approach, if you believe our tax system is to tax income, why is income earned because of retirement different and not subject to being taxed?"