State tax revenue expected to slow

A state council expects a much more dramatic downturn next year

The economic impact of fewer airlines serving Hawaii will not likely be reflected in the state's tax collections until the next fiscal year, according to the latest forecast by the state Council on Revenues.

For the 2008 fiscal year, which ends June 30, tax collections are expected to increase about 3.3 percent from a year earlier, the council said yesterday. That's less than the 3.9 percent growth that the council projected in March and amounts to about $27 million less in state tax revenue.

With the downturn in tourism expected to hit hardest this summer, the council yesterday predicted revenue growth of 2 percent in the 2009 fiscal year. That is down from 4.1 percent growth predicted three months ago, an estimated loss of about $128 million.

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By B.J. Reyes
bjreyes@starbulletin.com

State tax collections for the 2008 fiscal year are expected to be about $27 million less than originally thought, while that shortfall could more than quadruple by this time next year.

FINANCIAL HITS

A look at the financial impact of the Council on Revenues' revised revenue growth forecast for the current and upcoming fiscal years. The fiscal year begins July 1.

Fiscal year 2008

March forecast: 3.9 percent ($4.763 billion tax revenue)

May forecast: 3.3 percent ($4.736 billion)

Difference: $27 million less

Fiscal year 2009

March forecast: 4.1 percent ($4.958 billion)

May forecast: 2 percent (4.830 billion)

Difference: $128 million less

Source: House Finance Committee

The latest forecast by the state Council on Revenues predicts a moderate slowing of economic growth in 2008 with a more dramatic downturn in 2009 as the economy begins to feel the impact of fewer tourists and the higher cost of living in Hawaii.

The council released its quarterly forecast yesterday.

It comes roughly two months after the shutdown of Aloha Airlines and the loss of ATA from the state's travel market, coupled with other economic concerns such as the closure of Molokai Ranch and the ever-increasing price of gasoline and utilities.

For the current fiscal year, which ends June 30, tax collections are expected to rise about 3.3 percent, down from the 3.9 percent projected in March. That amounts to about $27 million less in state tax revenue.

With the downturn in tourism expected to hit hardest this summer, the council predicted revenue growth of 2 percent in the 2009 fiscal year. That is down from 4.1 percent growth predicted three months ago, an estimated loss of about $128 million.

Forecasts for later years were adjusted downward to reflect the lower growth rate in 2008 and 2009, but council members say they still expect larger growth in the out years.

Council Chairman Paul Brewbaker, chief economist for Bank of Hawaii, said the biggest hits to the economy -- fewer tourists and reduced spending -- are likely to occur in the first half of the fiscal year.

Barring any unforeseen event, "we can be reasonably assured that we can kind of reconnect to the past forecasts."

There also is the possibility that actual tax collections could come in higher than predicted.

Through the first 10 months of the 2008 fiscal year, tax collections are about 3.2 percent higher than the same time a year ago.

But state Tax Director Kurt Kawafuchi says that is partially due to about $50 million in tax returns being paid earlier than in the past, as more people take advantage of conveniences such as electronic filing and direct deposit. Not including those payments, collections are up about 4 percent up from a year ago, something that could be reflected in tax collections for May and June.

Lawmakers had prepared for a slowdown.

Although the council predicted in March 3.9 percent growth, the Legislature crafted its $11 billion supplemental budget on expectations of 3.5 percent growth.

"We took the conservative position because of what we were seeing going on in the local, national and international economies," said House Finance Chairman Marcus Oshiro (D, Wahiawa-Poamoho).

Still, with the projected shortfall of $155 million over the next two years, taxpayers should expect government to rein in spending just as any household would.

"I think the general public needs to understand that government services will be impacted by costs," Oshiro said.