Hawaii’s economy is on a normal growth path with a slowing tourism industry, but buoyed in part by improving labor and construction markets, economists told Hawaii lawmakers Thursday.

But the experts briefing the House and Senate money committees explained that state policy shifts could alter their projections — for better or for worse.

“We can easily get ourselves into a lot of trouble,” said Carl Bonham, executive director of the University of Hawaii Economic Research Organization.

University of Hawaii economist Carl Bonham discusses the state's economic outlook Thursday at the Capitol.
University of Hawaii economist Carl Bonham discusses the state’s economic outlook Thursday at the Capitol. Cory Lum/Civil Beat/2016

Raising the general excise tax, which is being proposed this legislative session to help provide long-term care for the elderly and boost public education, is a delicate decision. While political observers suspect a tax hike is unlikely, at best, in an election year, the measures are expected to be debated as the session unfolds over the next few months and may gain even more traction next year.

“The act of raising taxes is a drag on the economy,” Bonham said. “But if you spend the money wisely enough, it can offset that drag on the economy.”

It can be challenging to know what course to chart, however.

“There’s no one in the state that’s an expert on tax policy,” Bonham said, noting that even the state Tax Commission has to hire out-of-state experts because no one is studying and reviewing tax policy in Hawaii on an ongoing basis.

“Should we have a slightly higher excise tax? Get rid of the tax on food? I don’t have the answer,” he said.

This chart shows economic growth forecasts.
This chart shows economic growth forecasts. UHERO

The Legislature also can affect the economy when it comes to the regulation of industries, the economists said.

The state Public Utilities Commission, in particular, has a far-reaching ability to shape the market, especially electricity rates.

Bonham said it’s critical to give the agency sufficient resources to do its job. He said it’s good that PUC Chair Randy Iwase has filled vacant positions as the commission decides whether to approve the $4.3 billion buyout of Hawaiian Electric Industries by Florida-based NextEra Energy.

“The PUC is more important than who the utility is,” Bonham said, noting the importance of regulators being efficient in their duties and avoiding unnecessary delays. 

The economists said in general it’s good for the economy if government isn’t getting in the way.

Bonham agreed with Sen. Donovan Dela Cruz that investors can be deterred from putting money toward projects in Hawaii when the regulatory process fails, as happened with the Hawaii Superferry and the Thirty Meter Telescope.

In both cases, companies gained permits and certain entitlements that the courts later invalidated because the state messed up during the approval process.

“We’ve got to do better,” Bonham said. “I don’t think, ‘The court is overreaching.’ I think, ‘Why didn’t we go through the process right in the first place?'”

Dela Cruz said he’s concerned a bad business climate could affect the potential to develop land around rail stations on Oahu. The economists said Honolulu’s 20-mile rail project, now expected to cost at least $6.6 billion, has the potential to boost the economy.

This table shows forecasts of key economic indicators for 2016 to 2022.
This table shows forecasts of key economic indicators for 2016 to 2022. Hawaii Council on Revenues

Paul Brewbaker, principal of TZ Economics, questioned why Hawaii policymakers haven’t created markets in which emissions are capped and traded.

“Nobody in Hawaii is paying to emit atmospheric carbon and other greenhouse gases, and nobody is getting paid for innovative ways to sequester emissions,” he said.

This, in a state that has set a goal of 100 percent electric generation from renewable sources by 2045.

Brewbaker is tired of hearing doomsayers warn of exorbitant oil prices as they ask government to subsidize the next great fuel source that supposedly will be cheaper over the long haul.

“I’m not sure what to say to the mullahs of clean energy who are still holding out for $200 a barrel, but I don’t begrudge any investor in renewable energy who does not require a state subsidy,” Brewbaker said. “Go for broke.”

In inflation-adjusted terms, he said, oil prices today are about the same as they have been on average for the last 70 years.

Oil prices fell below $30 a barrel last week for the first time since 2003, with national economists saying turmoil in the Chinese markets contributed to the slide, the Wall Street Journal reported.

Lower oil prices have saved Hawaii consumers on electric bills and gasoline, which helped offset increased costs in health care.

Visitor arrivals are expected to slightly rise next year, but spending has flattened.
Visitor arrivals are expected to slightly rise next year, but spending has flattened. UHERO

Brewbaker said it’s important to keep an eye on China’s financial market turbulence, but he hasn’t seen it affect Hawaii much to date.

“China could slow down to 4 percent growth and wouldn’t cause a U.S. recession,” Bonham said. “We just don’t sell enough to China for that to happen.”

While there’s been a lot of focus on federal interest rates, Bonham said it’s more important to watch exchange rates. He said he’s planning a summer vacation in Canada because it’s basically on sale.

The yen depreciation at the end of 2015 raised costs for Japanese tourists to visit Hawaii by as much as 50 percent, Brewbaker said. And the euro’s depreciation raised costs for Europeans to visit Hawaii by more than 20 percent.

“These have been challenging headwinds for Hawaii international tourism performance,” he said.

Inflation grew 1 percent in Hawaii in 2015, according to the U.S. Bureau of Labor Statistics. That’s the lowest increase for the state since 2009, but still far higher than the national average of just 0.1 percent.

The state Council on Revenues’ quarterly forecast in early January projected a 6.7 percent growth in general fund revenues for fiscal 2016, which ends June 30, and a 5.5 percent increase in 2017 and 2018.

State economist Eugene Tian believes the forecasts are conservative, as does Bonham, who’s an influential member on the council.

The economists noted the challenge in forecasting the benefits of construction picking up.

“We who use building permit values and government construction contracts to forecast construction spending and employment got faked out,” Brewbaker said. “Slapping PV panels on a roof is faster, and yields contracting receipts sooner, than when Ala Moana Center builds another Ala Moana Center, which takes more time.”

While the Honolulu rail project is the most expensive public works project in the state’s history, Hawaii is not where it was in the past in terms of investing in public works projects.

“Building ‘TheTrain’ is impressive, or an affront, depending on your aesthetic point of view and whether you wanted to get to UH,” Brewbaker said. “Still, Hawaii in the 1960s and 1970s invested more in public capital formation than at any time in the last two decades, multiples in terms of public investment as a percent of GDP.”

Read the presentations from Bonham, Brewbaker and Tian below.

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