The state Council on Revenues upgraded the state’s tax collection forecast Thursday, predicting that the housing and construction sectors of the economy will follow tourism into the recovery.
The council increased the revenue forecast for fiscal year 2013, which ends in June, to 5.1 percent growth, up from 4.9 percent in September. The council raised the forecast for fiscal year 2014 to 6.8 percent growth, up from 3.9 percent. The state estimates that the new forecast will mean an additional $10.3 million in tax revenue this fiscal year and $162.3 million in more revenue the following fiscal year.
The new forecast was welcomed by the Abercrombie administration, which has proposed a two-year budget draft that restores money cut from public-worker salaries over the past two years, boosts spending on early childhood education and information technology, and begins to address the unfunded liability in the public-worker health care fund.
Economists on the council and state budget analysts remain concerned, however, about the drain on state revenue from solar tax credits, the uncertainty from the debate in Washington, D.C., over federal spending and debt reduction, and the potential loss of federal money from the death of Democratic U.S. Sen. Daniel Inouye, who was chairman of the Senate Appropriations Committee.
"I am pleased the Council on Revenues is taking a long-term view of our economic future, which coincides with our financial plan — working responsibly toward a stable fiscal growth," Gov. Neil Abercrombie said in a statement. "The budget proposal that we submitted to the Legislature is mindful of the revisions of the council. The rate of revenue growth that they continue to forecast in the current year makes sense and is still very strong."
Kalbert Young, the state’s budget director, said the new forecast will likely allow the state to avoid immediate tax adjustments to generate new revenue. But he said the state may need additional revenue to stabilize the budget during the life of the six-year financial plan.
Tax collections this fiscal year set the base for the two-year budget draft under review by the Abercrombie administration and the state Legislature, which covers fiscal years 2014 and 2015. The governor has proposed a $11.7 billion budget for fiscal year 2014 — up 8.1 percent over this fiscal year — and a $12 billion budget for fiscal year 2015 — up 10.8 percent.
Young, who briefed the state Senate Ways and Means Committee and the House Finance Committee on the budget draft Thursday, also warned of what he called the "Inouye cliff."
"My opinion is that there is no way to quantify or measure, because the value that Sen. Inouye contributed in terms of what he was able to accomplish for Hawaii — not only in funding, but politically in Congress, leadership, all of those components — there is no way to measure how big that impact is," he said. "And how much can the current congressional team overcome those issues? There’s just no way to measure that."
Economists on the council see an overall positive trend but were cautious in their forecast.
"Waikiki is doing gangbusters and that’s finally spreading. Plus, housing is getting better," said Richard Kahle, chairman of the Council on Revenues. "And, of course, with Sen. Inouye going, that’s a problem. This fiscal cliff No. 2, which is in March, that’s a problem.
"So it’s sort of a chop suey, plus-and-minus game."
Eugene Tian, the state’s chief economist, confirmed to the council again Thursday that a solar tax credit could cost the state $173.8 million for 2012, an estimate that had led the council to downgrade the forecast in September. Tian acknowledged that some of the cost of the solar tax credit is offset by solar construction, a point that many in the solar industry and environmental community claim the state has downplayed in previous criticism of the tax incentive.
Consumers and solar companies rushed to install photovoltaic systems to take advantage of the tax credit before January, when new state administrative rules intended to curtail the credit took effect. Environmentalists have challenged the new rules in court, and state lawmakers might make their own revisions to the solar tax credit this session, so economists have found it difficult to pinpoint the exact revenue impact.
Sen. David Ige (D, Pearl Harbor-Pearl City-Aiea), chairman of the Senate Ways and Means Committee, said lawmakers also see an economy in recovery but expect to take a prudent approach to the budget.
"After having to struggle with billion-dollar reductions for three straight budget cycles, we don’t want to get in that situation again," he said. "So we want to be careful. We want to evaluate what the proposals are to increase state funding, and then make strategic decisions about those most important to move the state forward."
