The state Legislature brought order to Hawaii’s giant financial problems Tuesday, combining tax increases with spending cuts to create a balanced two-year budget.
The House and Senate voted to pass tax increases on businesses, vehicles and large incomes, raising more than $600 million over the next two years to help address a projected $1.3 billion deficit during that time.
They also cut $600 million from Gov. Neil Abercrombie’s requested spending, drained the state’s savings accounts and reduced government health costs to pay for the state’s $11 billion annual budget.
"I’ve always said that we will work with the budget we have. We will seize this opportunity to transform government," Abercrombie said.
Despite the slumping economy and lagging tax collections, the Legislature avoided approving broad, unpopular proposals to tax pension income or raise the general excise tax, which is paid on most transactions statewide.
Instead, the biggest tax hike hit construction subcontractors, subleasors and Hawaiian Airlines. Those businesses will lose their exemption to the state’s general excise tax, which is 4.5 percent on Oahu and 4 percent on neighbor islands, generating about $200 million a year for the government.
"We knew we were kind of backed into a corner once the governor decided that he wouldn’t entertain the GET increase," said Senate President Shan Tsutsui, D-Wailuku-Kahului.
Opponents of the legislation removing business tax exemptions said it will hurt the economy and costs will be passed on to consumers.
"It actually will cost us jobs. It will raise the price of many of our goods and services, and certainly raise the cost of living in the state," said Sen. Roz Baker, D-Honokohau-Makena. "It may get us a little bit of money, but at what price?"
New taxes affecting motorists standardize rental car surcharges at $7.50 per day and raise vehicle registration and weight fees by an average of about $50. Part of the surcharge will be diverted to the general fund, bringing in $60 million, and vehicle fees will go toward a fund dedicated toward improving the state’s roads.
Another bill targets individuals making more than $100,000 and couples with incomes over $200,000 by removing their state income tax deduction and limiting their itemized deductions. It also delays increases in standard deductions and personal exemptions, raising about $57 million a year.
The state government’s money troubles left little room for lawmakers to create new programs or enact many of Abercrombie’s initiatives.
But other measures approved by the Legislature included same-sex civil unions, an appointed Board of Education, recognition of Native Hawaiians and an overhaul of foreclosure laws featuring new consumer protections.
"You have to balance your budget first before you can ever consider new programs," said House Speaker Calvin Say, D-St. Louis Heights-Wilhelmina Rise. "Everybody wants services … but nobody wants to pay the bill."
The state budget that passed Tuesday spends about 8 percent more money than in the current fiscal year, in large part because of increased demand for government services, most notably Medicaid.
Additional cost increases come from rising debt service payments and public workers’ health and retirement benefits.
The only Republican in the 25-member Senate, Sam Slom, called the spending plan a "budget buster" during a speech from the Senate floor.
"We’ve been putting a lot of people’s lives in jeopardy through tax hike discussions," said Slom, R-Diamond Head-Hawaii Kai. "It’s something that is going to continue to lower the standard of living and the options for every man, woman and child in this state."
Others bemoaned the lack of proposals to stimulate the economy because lawmakers focused on balancing the budget.
"Essentially, all we became were master cutters," said Rep. Gene Ward, R-Kalama Valley-Hawaii Kai.
Although the budget balances now, it could be thrown off if the state Council on Revenues reduces the state’s economic forecast later this month. Then lawmakers may have to return to the Capitol for a special session, and Abercrombie would likely have to restrict spending.
In all, lawmakers approved more than 150 bills Tuesday and sent them to Abercrombie for his signature or veto.
Only a few measures were pending for the Legislature on Thursday, the last day of this year’s session, including proposals to cut their own pay and reform the government employee retirement system.