State House and Senate launch budget talks

The state House and Senate on Tuesday began public discussions on next year’s budget, which is expected to total more than $14 billion.

Those talks, which will continue in public and private meetings in the weeks ahead, are more politically charged than usual because they come during an election year and include proposals for possible tax increases even though the state is again running a near-record budget surplus.

Senate Ways and Means Committee Chairman Donovan Dela Cruz prefers to describe his proposed tax increases and other changes as “revenue enhancers.”

House Finance Committee Chairwoman Sylvia Luke said she supports changes to promote “tax fairness” and an “equal playing field.”

Meanwhile, state tax collections are booming. Lawmakers recently released a new financial plan by Gov. David Ige’s administration that projects the state will close this fiscal year on June 30 with a general fund budget surplus of more than $1 billion, meaning the state will have racked up 10-digit surpluses in two of the last three fiscal years.

That has never happened before, and the latest tax collections published by the state Department of Taxation suggest even that projection is probably conservative.

The House’s proposed budget assumes state tax collections will grow by 4.5 percent this year, while the Senate assumes it will increase by a robust 5.3 percent. However, actual collections through the end of March grew at a rate of 6.5 percent.

If that trend continues for the next three months, tax collections will be about $80 million more this year than the Senate expected, meaning the state budget surplus for fiscal year 2018 might set a new record.

Still, Dela Cruz is fretting because the Ige administration proposed spending down much of the budget surplus over the next four years.

The administration is depending on cash reserves to cover expenses in the years ahead, and “the state is spending more than what it generates,” Dela Cruz warned colleagues in a Senate floor speech April 10.

One major reason is the surging cost of the state’s public employee health and retirement benefits.

In the fiscal year that begins July 1, the state will have to pay $787 million for the future health benefits of public workers and retirees, and $676 million for the current health coverage of active employees and retirees.

The state also will have to contribute $855 million next year for its share of the public workers pension fund, according to the state Department of Budget and Finance.

And those annual obligations will grow in the years ahead. The state’s share of the unfunded liability for the Employer-Union Health Benefits Trust Fund, which provides public worker and retiree health benefits, is more than $9.3 billion, while the state’s share of the unfunded liability for the public workers’ pension fund is another $8.94 billion.

“We can’t just keep kicking the can down the road,” Dela Cruz said.

His proposed draft budget incorporates tax increases or changes to raise an extra $70 million beginning July 1, and would raise more than $96 million annually in the years ahead, according to the Senate proposal.

That would allow the state to squirrel away $81.4 million in its Emergency and Budget Reserve Fund — also known as the “rainy day fund” — which would bring the amount in that reserve fund to almost $400 million.

In addition, Dela Cruz’s plan would allow the state to maintain large year-end budget surpluses ranging from $829 million to almost $1.1 billion over the next five years, according to documents provided by the Senate.

The Senate voted to pass bills to increase the state conveyance tax for residential investment properties worth more than $2 million, increase taxes on timeshares and tax the “resort fees” that are often charged to hotel guests separately from the basic room rates.

His package also includes proposals to increase taxes paid by online platforms for transient vacation rental bookings and take steps to collect taxes owed for online retail purchases. Dela Cruz describes those as “revenue enhancers” because taxes already are owed for those online purchases but often go unpaid.

But Dela Cruz is not up for re-election until 2020, and the entire House of Representatives must stand for re-election this year. As lawmakers enter the homestretch, it is unclear whether the House will accept Dela Cruz’s proposals.

Luke, who is leading the budget negotiations for the House, said she is inclined to consider only those tax proposals that “level the playing field.” As an example, she cited proposals lawmakers have considered in recent years to require online retailers to collect state excise tax on online sales and remit those taxes to the state.

Technically that tax is already owed by anyone who makes a purchase online, but it often goes unpaid, which puts local retailers who must pay the state tax at a disadvantage.

Luke said she also supports the idea of depositing more money into the “rainy day fund” to prevent a repeat of the budget shortfall during the Great Recession, when the state had to cut spending by imposing furlough days that closed schools and government offices.

To do that the House advanced Senate Bill 192, which Luke said would require that more than $50 million in tobacco settlement funding be deposited into the rainy day fund.

Lawmakers will meet again Friday to continue their budget discussions.