State House and Senate negotiators last night moved a host of tax and revenue-generating options, hopeful that they have done enough to close a projected $1.3 billion budget deficit over the next two years.
The most significant tool is a bill that would temporarily suspend general excise tax exemptions on nearly two dozen business activities — including tax breaks for contractors, airlines and businesses that sublease — which would bring in about $200 million a year.
The second largest step is a bill that would repeal a state income tax deduction on higher-income taxpayers, cap itemized deductions on higher-income taxpayers, and delay an increase in the standard deduction and personal exemption. The bill would generate $51.8 million a year.
Lawmakers agreed to cap hotel-room tax revenue that goes to the counties and the Hawaii Tourism Authority, which would bring the state more than $30 million a year.
Lawmakers signed off on a bill that would adjust rental car surcharges and divert some of the money into the state’s general fund for one year. The bill would capture about $60 million in fiscal year 2012.
But House and Senate negotiators, working to make a midnight procedural deadline to have bills ready for final votes before the session adjourns on Thursday, got entangled over a pension tax.
State Sen. David Ige (D, Aiea-Pearl City), backed by Senate leaders, drew the line on any tax on pension income. Rep. Marcus Oshiro, (D, Wahiawa), supported by House leaders, refused to drop a pension tax from the bill that contained several of the other tax options.
For a few hours yesterday, the impasse over the pension tax temporarily put the other tax options at risk. Late last night, lawmakers agreed to kill a pension tax and save the other tax options, but the fallout ended talks on several other bills many lawmakers wanted to advance.
"There is no additional monies to expand programs or pay for new programs or extend credits," Oshiro said of the bills that have likely failed. "This is a very, very, very tight budget."
Lawmakers may still revive some of the bills before session adjourns if they feel they are essential, but negotiations would move onto a tightrope with only two floor sessions left to take action.
The two-year budget draft relies on new revenue to combine with labor savings, spending cuts and state program adjustment to balance.
"The economic situation, being as bleak as it was, we had to do a combination of things to look for additional revenue and to look for further cuts in the budget," said Senate President Shan Tsutsui (D, Wailuku-Kahului). "Hopefully, things start getting better. And I think what we’ve done is identify the core programs and services we need to be efficient in terms of running state government."
Business interests — and some of the state’s best lobbyists — tried to talk lawmakers out of suspending general excise tax exemptions, warning that losing the tax breaks even temporarily could undermine economic recovery.
But Gov. Neil Abercrombie and House leaders indicated they would not support an increase to the general excise tax, so Senate leaders — who had opposed suspending the tax exemptions — relented because there was no other alternative left that would generate sufficient revenue.
Business interests doubt, however, that lifting the tax exemptions will produce the revenue the state expects, because the businesses targeted may change behavior to avoid the full brunt of the tax.
The state Department of Taxation has already reduced estimates from the loss of a subcontractors’ deduction — the largest source of projected revenue — and others because of potential behavioral changes.
"We had already taken a lot of the low-hanging fruit," House Majority Leader Blake Oshiro (D, Halawa-Aiea), said of previous tax and spending decisions to get through the recession. "So this was a really tough one. We went deep into the base and core of the budget, and we also did some revenue enhancements."
House Minority Leader Gene Ward (R, Kalama Valley-Hawaii Kai) said suspending the tax exemptions could result in higher consumer costs for home renovation or air travel if the business interests targeted raise their prices.
"These are things that stall the economy," he said. "If you stall the economy, you’re going to hurt jobs. You’re going to take those who have investment capital to create jobs — you’re going to push them back into their shell — and we’re just going to sputter.
"That’s my biggest fear."
Over the past few days, a pension tax appeared to be the lever that influenced talks on several other issues.
Ige — who had favored a GET increase to close the deficit but was undercut by other senators — stood firm against a pension tax.
Late yesterday afternoon, the Senate Ways and Means Committee chairman publicly outlined how lawmakers could balance the budget without a pension tax and did not budge when Oshiro refused to drop the idea and put the other tax options in jeopardy.
Gov. Neil Abercrombie had initially called for a pension tax that would generate more than $100 million a year. House leaders would only agree to impose a pension tax on higher-income retirees, which whittled the revenue to $17 million a year. The House narrowed its proposal further yesterday — adding a break on pension income that would have likely shielded most public-worker retirees from the tax — so it would only bring in $7 million a year for the first two years.
Some House lawmakers were privately disappointed that they had voted at least twice for a pension tax this session — and also moved out several other revenue-generating bills to keep a variety of options alive — while the Senate sidestepped a vote.
Abercrombie, Say and others said a pension tax would make the tax code more equitable by taxing pension income like other retirement income.
The governor spoke with both Say and Tsutsui late yesterday afternoon to see if a compromise were possible. The Senate, sources say, refused to bundle a pension tax with the other tax options and, if anything, would only agree to have a separate up-or-down vote on the pension tax.
Ige said the discussion had become more about finding revenue to balance the budget than a policy debate. He said he wants the next Tax Review Commission to do a substantive analysis on a pension tax.
"The decision to tax pensions is a policy decision. And we ought to make it in that context," Ige told reporters afterward. "We shouldn’t be forced to make that kind of a decision just to balance the budget."
The pension tax was politically dangerous. AARP Hawaii had mobilized over the issue, with dozens of seniors in red T-shirts descending on the state Capitol or calling lawmakers’ offices over the past several weeks. Seniors have suggested they will not forget which lawmakers were on their side.
"We had deep problems with it," said Barbara Kim Stanton, the AARP’s executive director. "On this one, you’re going to find that the pensioners felt like it was the senators who saved the day for them, because they held fast."