State of Hawaii

State faces deficit
of $100 million

Lingle blames new tax credits
for an expected decline in revenues

A steep drop in April tax collections was largely caused by businesses taking advantage of loopholes in a new tax credit law and may lead to a $100 million state budget shortfall, Gov. Linda Lingle said yesterday.

"We are now giving back more in tax refunds than we're collecting in corporate taxes," she said.

The state Department of Taxation reported yesterday that April tax collections were down 27.3 percent, or $87.5 million, from a year earlier, to $232.7 million.

Tax Director Kurt Kawafuchi said that if the trend continues, general-fund revenue for fiscal 2003 will be up just 0.7 percent from 2002. The state Council on Revenues, the agency charged with estimating tax revenue, predicted a 4.3 percent growth in tax revenue in its last report, March 13. Lawmakers use the council's estimations when putting the state budget together.

If May and June revenues do not improve, it puts the just-passed two-year, $7.5 billion state budget about $100 million out of balance going into the first year starting July 1.

At a state Capitol news conference yesterday, Lingle said she will map out a plan to deal with the budget shortfalls through the end of this fiscal year, but will need to talk to legislative leaders about what to do with the new two-year budget.

She said too many businesses were taking advantage of Act 221, which gives tax credits to high-tech businesses, and complained that the House would not agree to changes to the law that would close loopholes.

Lingle said the Tax Department has told her that "insurance companies and high-worth individuals are taking a reasonable advantage of what exists" in the Act 221 high-tech tax credits, causing much of the loss in state revenue.

Lingle said she was concerned that while the Senate backed her position to amend Act 221, the House leaders "refused to face this."

"After the Senate started to get it, the House dug in harder. The House refused to understand what we were presenting to them," Lingle said.

House Speaker Calvin Say, however, said the Lingle administration has not made a case that shows who is taking money in Act 221 credits without returning investments to the state economy.

"All of this has not yet been addressed," Say said. "If there is tremendous abuse, I want the state to go after it."

Corporate income tax revenue for April was down 36.9 percent, and individual income tax receipts were down 56.3 percent from a year earlier. The state said the numbers indicate that "open-ended" income tax credits "are a major component of the explanation."

In April the state paid total refunds of $63 million to individual taxpayers and $5.1 million to corporations.

For the first time, the state has paid out more tax refunds to corporations during the first 10 months of the fiscal year, $45.9 million, than it received in corporate income taxes, $41.8 million, Kawafuchi said.

But outside experts said that there is not enough information to determine what role tax credits might be playing in the drop in revenues.

Tax watchers noted that general excise and use taxes brought in $1.49 billion through the 10 months, up 8.7 percent from $1.37 billion last year, and this might mean the tax credits are working to create new business. Still, the $120 million in increased excise tax revenue is less than the $144 million drop in personal and corporate income taxes.

Economists said it is too soon to place blame on the tax credits.

"Based on the evidence I've seen, it's too early to make that conclusion," said Byron Gangnes, a University of Hawaii economics professor.

Gangnes said there is not enough information to know how much of a role the tax credits played in the decline in corporate and individual income taxes, or how much of a role they may have played in boosting the overall economy.

One reason for lower personal income taxes, he said, was the quarter-point personal income tax rate cut that took effect last year, he said.

"It does appear, from at least a preliminary look, that that tax cut alone cannot explain the full drop that we're seeing," he said. "That's why the administration is at least appropriately wondering whether or not the tax credits could account for how big the drop was."

Kawafuchi called the income tax declines a stark contrast to the rise in the general excise and use taxes, which he said indicates the economy is sound. But, he said, the economy may be held back by too many tax refunds.

Lowell Kalapa, president of the nonprofit Tax Foundation of Hawaii, said the residential remodeling credit and the credit for hotel reconstruction may be reducing the take from income taxes, but the money saved "is money flowing through the economy."

Kalapa said that while personal income taxes are down, withholding taxes on wages for the 10 months of the financial year were up 1.3 percent to $871.5 million.

"It means that people are being employed," he said.

The Associated Press contributed to this report.

State of Hawaii

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