Uncertainty led State tax code changes and uncertainty over the economy led the state Council on Revenues to make a projection of tax revenue that was off by $88 million, two council members say.
to revenue miscue
Tax code changes and Sept. 11
are blamed for the underestimationBy Pat Omandam
pomandam@starbulletin.comJust how the Hawaii economy would react over the fiscal year to the Sept. 11 terrorist attacks made predictions on tax revenues "tricky," council Chairman Michael Sklarz said yesterday.
"We all knew that this was going to be a challenging year, and obviously we wanted to do better," Sklarz said. "I think that people can relate to the predicament that we're in."
Economist Paul Brewbaker, council vice chairman, said, "If you're going into the tax code every year and changing a half-dozen different things without a good idea of what the revenue implications are, it shouldn't be that much of a surprise when the revenue doesn't show up."
The state Tax Department reported this week that tax revenue during the fiscal year that ended June 30 was down 3.5 percent, or $109 million behind the previous fiscal year's total. The council had predicted that tax revenues would fall just 0.7 percent, or about $21 million.
The difference of $88 million has state budget officials scrambling to see where they can absorb the shortfall and state legislators warning of potential budget-tightening measures in the next legislative session.
The seven-member council prepares revenue estimates each quarter that the governor and Legislature are required to consider when preparing the state budget.
Sklarz said the council uses the revenue generated from the state general excise tax as a barometer for its forecasts. The excise tax accurately reflects the commerce going on in Hawaii and is the main driver of the economy, he said. Past studies have shown that practice to be highly accurate, he said.
The problem, he said, was the impact of changes in state tax laws, withholding rates, ongoing tax credits and filing deadlines -- all adjustments that made it difficult to gauge how much revenue would be paid to the state this fiscal year. Also an unknown factor was the lag that developed between the post-Sept. 11 Hawaii economy and the tax revenue taken in.
For example, Sklarz said, the Hawaii economy was down during the first three months following Sept. 11 although revenues remained high. Now, revenues are down while the economy is doing better.
Brewbaker added that the council stuck with its 0.7 percent decline for the year at its last meeting in May because there was so much uncertainty in the economy. The council did not want to contribute to the uncertainty by changing the forecast every time it met.
Still, Brewbaker said he was surprised by the magnitude of the tax revenue loss. Contributing to it were recent changes in tax filing deadlines, the proliferation of tax credits and capital losses due to the decline in the stock market that resulted in smaller quarterly income tax payments.