Fears over the coronavirus could mean a $300 million hit to state tax collections.
The state Council on Revenues on Wednesday projected that the state should expect no revenue growth in state taxes in fiscal year 2021, which begins July 1. They lowered the projection for the last three months of this fiscal year by 0.3%, or about $22 million.
Even in the face of a downturn, lawmakers are still firm on passing a package that includes over $70 million worth of tax benefits for the working poor as well as a proposal to spend $200 million developing affordable housing in West Oahu.
Tax collections are expected to rebound in 2022 to coincide with a projected economic recovery coming at the end of 2021.
The Council on Revenues is a panel of tax experts, economists and accountants who meet four times each year to set projections for state tax collections.
At its January meeting, the council raised its projection for tax collections in fiscal year 2021 by 1% over a previous projection. That meant lawmakers had an extra $74 million to spend out of the state’s general fund, which is on track to collect over $7.4 billion in taxes.
That raise had little effect on their budget decisions earlier this legislative session.
But that was before the COVID-19 scare plunged markets across the globe. International passengers to Hawaii are down nearly 36% from this time last year. Domestic flights, which make up the bulk of tourists coming to Hawaii, have yet to drop below the same level last year but are expected to decline eventually.
Anecdotally, businesses that service tourists are already starting to feel the effects.
Sen. Donovan Dela Cruz said lawmakers must find parts of the budget to help save costs. Dela Cruz, who chairs the Senate Ways and Means Committee, didn’t have any specific areas of the budget to cut, but suggested lawmakers may look to tax credits that cost the state money but aren’t in use.
The Legislature could also look at different bills that could generate revenue. More taxes on the wealthy could produce over $60 million for the state. Lawmakers are also considering a corporate tax on Real Estate Investment Trusts.
“There’s some bills out there that increase revenues and others out there to reduce expenses,” Dela Cruz said. “We’re just trying to get a hold on all that and trying to put this puzzle together.”
Lawmakers aren’t likely to touch their joint legislative package or new union contracts to save money, Dela Cruz said.
The joint legislative package could cost at least $70.5 million in 2021, the majority of which comes from a tax relief measure for the working poor.
“In a down economic time, you cannot make it worse for them,” Dela Cruz said of the low income.
Lawmakers also need to factor in new collective bargaining agreements, which could cost a total $46.1 million this year and $63.9 million in 2021. The Legislature also plans to spend at least $10 million fighting the coronavirus.
The council’s January projection was based on a slightly rosier outlook for Hawaii’s economy going forward. Barring any kind of disaster, the council believed the projections would hold through to at least the end of the year.
The council included a 1% decline in revenue in 2022 and 2023 to factor in a possible recession. Tax collections were expected to return to normal in 2024.
The Legislature uses those projections when building the state budget, which is set every odd-numbered year.
This year, Gov. David Ige asked the Legislature for an additional $429 million for fiscal year 2021, which begins July 1. His supplemental budget also included $1.4 billion worth of building and repair projects across the state.
Lawmakers also have their own budget priorities, which include millions for housing, healthcare, schools and homelessness.
The Legislature is already preparing the state for any negative side effects brought on by COVID-19.
Saiki wants to avoid drastic budget cuts to state services made during the financial crisis more than a decade ago. Meanwhile, the Senate has been working with the state to ensure that services can continue running in the event the virus becomes more widespread.
Senate Bill 75, which is now awaiting a hearing from the House Finance Committee, would give Ige’s administration over $10 million in emergency funds to respond to the virus. A similar House measure is also still moving in the Senate.
Anecdotally, the effects on Hawaii’s economy are starting to become visible, especially for businesses that rely on tourists.
A case in point is Scratch Kitchen in Ward Village in Kakaako. Known for its breakfast bowls and pancakes, the restaurant usually does a brisk morning business. But that wasn’t the case on Tuesday. At around 9:30 a.m., there was just one large party eating.
“We would probably usually be at least half full at this time,” said Kent Simpson, the restaurant’s manager. “And maybe 80% would be tourists.”
Another example: 88 Tees, the local T-shirt shop that’s big in Japan.
Trinkey Chan, the store’s owner, said she had seen a decline in business but couldn’t quantify the decline. She said her shop wasn’t hurt as much as some because many of her customers are younger people who aren’t among the demographic suffering the worst effects.
Among those buying shirts at 88 Tees on Tuesday morning was Melissa Woon, who was visiting from San Francisco with her mother, Loretta Woon, to celebrate Loretta’s 60th birthday. The Woon’s were being careful, but hardly panicking.
“We’re just a little more mindful of areas that people touch,” she said. “And we’re always carrying hand sanitizer.”
The situation in Honolulu’s Chinatown has been a mixed bag. Tomas Orta, the manager of Brick Fire Tavern on Hotel Street, said he hasn’t seen any decline in business, but he said he and others in the neighborhood are aware of the risk and might have to cut back shifts or hours for staff if customers start staying home.
For now, he said, staff are doing what they always do: just more so — washing hands frequently, being aware not only of their own cleanliness but that of customers they contact.
“It’s just the types of things you always preach in this industry — just being even more vigilant about them,” he said.
But outside the bars and restaurants there might be a decline. Mike Kwok, who teaches a weekend Cantonese language class, said five of his students didn’t show up for his class on Saturday. And he said people are staying away from the often bustling parts of the neighborhood.
“The Cultural Plaza is pretty dead,” he said.
Other businesses were taking more drastic measures. Murphy’s Bar & Grill said it would cancel its annual St. Patrick’s Day Block Party due to concerns regarding the coronavirus outbreak. The Kapu‘uola Hula Festival, which attracted 2,000 people last year, including about 400 visitors, said it would postpone this year’s event.
“Keeping our people safe and protecting the health of our community is our number one concern,” says Maka Anuhealii, Chair of the Kapu‘uola Planning committee.
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