Revenue rise predicted

Changes in tax laws enacted this year are expected to boost the state’s general fund while Hawaii continues a slow, steady recovery from the global recession, top economists predict.

The state Council on Revenues Tuesday issued its quarterly general fund forecast, predicting revenue growth of 14.5 percent in the current fiscal year that ends June 30, 2012, up from 11 percent predicted in July.

Revenue in the next fiscal year is expected to climb 6.5 percent, up from 6 percent in the previous forecast, with more modest growth forecast in succeeding years.

Increases are due primarily to temporary tax law changes that are expected to bring in more than $600 million over the next two fiscal years to help balance the budget and end the previous administration’s practice of delaying tax refunds.

“We upped that (previous forecast) to 14.5 percent, but a lot of that is around the latest tax law changes — which were all increases — and the refund problem we’ve been suffering with for a year,” said Richard Kahle, the new Council on Revenues chairman.

Other sectors of the economy, such as construction and tourism, appear static.

“We’re doing better than the mainland, but it doesn’t appear to be a robust recovery,” Kahle added.

In a statement, Gov. Neil Abercrombie acknowledged economic challenges ahead but said he remains confident the state is on the right path to recovery.

“Hawaii needs to continue sound fiscal policies that will enable economic growth that addresses our financial challenges, cares for our environment, invests in people, and creates the good jobs that will keep future generations here in Hawaii,” Abercrombie said. “We need to continue forging ahead with our administration’s plan to spark immediate job growth through public works projects; build a sustainable economy in Hawaii including in clean energy, food security and broadband; and carefully manage our tax dollars.”

The state ended the 2011 fiscal year on June 30 with a general fund total of about $4.3 billion, about 1 percent less than the previous year, according to preliminary estimates by the state Tax Department.

The tax law changes passed in the 2011 Legislature include a cap on the amount of hotel room taxes distributed to state agencies and county governments, an increase in the rental vehicle surcharge, a cap on itemized deductions, a repeal of some income tax deductions, a delay in increases for standard deductions and personal exemptions and temporary suspension of general excise tax exemptions on nearly two dozen business activities. Those changes all are scheduled to expire after two years.

Legislators estimated the changes would generate up to $600 million over the fiscal biennium, but economists are not as optimistic.

The projected 14.5 percent increase is a more conservative estimate based on the assumption that some businesses might adjust their activities — or go out of business altogther — to avoid having to pay the added taxes.

Because the state Tax Department will not have actual numbers on collections until its next meeting, the figures are all estimates, Kahle said. But some economists estimated the council’s forecast is about $120 million less than the Legislature’s estimates.

“How people adapt to them and whether or not the additional costs drive businesses out of business, which then would have a negative impact, I think is what the council took into account by lowering the estimate of added revenue,” said Lowell Kalapa, head of the Tax Foundation of Hawaii, a policy analysis organization.

House Budget Chairman Marcus Oshiro (D, Wahiawa-Poamoho) said the estimates were based on testimony during the legislative session, but he had not had a chance to speak to the council or the Tax Department about the latest projections.

“At best, we should be taking a cautionary approach to next year’s budget and watch it very carefully knowing that we may have to make adjustments both on the expenditure and revenue side,” Oshiro said.

Like other states, Oshiro said, Hawaii is expecting fewer federal dollars, which would affect state programs and force lawmakers to at least look at raising taxes in 2012, an election year.

“It’s a general rule of thumb that we’re reluctant to raise taxes in an election year,” Oshiro said. “However, if there is a great need for it and a necessity for it, we may look at some other forms of revenue to provide for these essential services.”