State of Hawaii

$143 million
shortfall forecast

Tax law changes will cut revenues
but Lingle remains optimistic

Tax credits and tax law changes will cause the state to take in $143 million less than expected over the next 26 months, the state Council on Revenues announced yesterday.

Gov. Linda Lingle responded that the state would manage the revenue drop, although she noted that the figure means less money than what was used to calculate the two-year, $7.5 billion budget recently passed by the Legislature.

"We still face some tough decisions on the budget, and will discuss the appropriate course of action with our directors and legislators to ensure that core functions and public safety are maintained," Lingle said. "We plan to address these issues without convening a special session of the Legislature."

The tax revenue shortfall did not alarm leaders in the House and Senate, who said they could manage with less.

"Gov. Lingle has a considerable amount of authority to restrict and cut spending over the next six months, giving time for tax revenues to pick up," said Senate President Robert Bunda.

Calvin Say, speaker of the House, called the downturn "manageable."

The Council on Revenues is required to make the official estimates of how much money the state will collect in taxes and other revenues. Chairman Mike Sklarz said the council calculates that about 30 percent of the drop in revenues comes from a new high-tech tax credit. Also, recent changes in the amount of money withheld for estimated tax payments resulted in a $36 million loss, he said.

Both Bunda and Say agreed that when the Legislature returns in January it can again look at the issue of high-tech tax credits, which Lingle has blamed for much of the shortfall.

The remainder of the drop, Sklarz said, is from construction and other tax credits.

However, he stressed that Hawaii's economy is strong and is not showing major problems.

"The economy is doing good," Sklarz said.

Real estate and construction are up and tourists from the mainland are countering the drop in Japanese visitors, Sklarz said.

Two months ago, the council predicted that tax collections would grow 4.3 percent for the current fiscal year, which ends June 30.

The council lowered that figure to 1.8 percent. Tax officials said that translates into a loss of $73 million.

The tax revenue growth for the 2004 fiscal year, which starts July 1, is now estimated to be $38 million lower than originally anticipated. And the 2005 fiscal year revenue estimate is now $32 million lower.

Lowell Kalapa, director of the private Hawaii Tax Foundation, called the council's projections "overly optimistic," adding that tax credits are likely to have a larger impact than calculated.

Lingle had urged the Legislature this year to change the high-tech tax credits because of warnings from the state Tax Department that the credits were being misused.

Yesterday, Say said the Legislature would examine the role of tax credits in the local economy. But, Say added, the review would include how much extra business and investment the credits stimulate and not just the cost in lost revenue.

"I think we are in pretty good shape, but we will review tax exemptions and tax credits," Say said.

State of Hawaii

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