Lawmakers may still need to come up with about $431 million to plug a budget hole that has grown wider after recent projections for tax collections for the coming year were calculated.

The state Council on Revenues, a group of economists and financial experts that is tasked with estimating how much money the state will have to spend, cast a dismal financial outlook Thursday. For this fiscal year, the state is expected to bring in 11% less in tax revenue than in 2019. Collections could be down another 12% in 2021 over this year.  

That means Hawaii could have $2.3 billion less to spend than was previously thought. Lawmakers were expecting to save about $12.3 million after 2021. Now, they’ll be looking at a shortfall.

The slow down in tourism and its effect on the economy was the focus of the Council on Revenues.

Cory Lum/Civil Beat

The Legislature tucked just over $1 billion into the state’s rainy day fund in preparation for the expected drop in revenue, and there is also about $500 million in carryover funds from 2019.

Once the fiscal year ends June 30, Hawaii is expected to collect $6.3 billion in taxes, far less than previously projected.

And state tax collections may not rebound until 2022, the council is predicting.

The projected drop in revenue is linked to the tourism industry’s nosedive, the result of government officials effectively stopping the flow of visitors into Hawaii beginning in March to slow the spread of the coronavirus. The industry accounts for about a third of tax revenue in Hawaii.

In March, Ige imposed a 14-day travel quarantine on anyone flying into Hawaii as well as interisland travel.

On Thursday, Ige said he planned to extend the mandatory 14-day quarantine beyond June 30, when it was set to end, but didn’t say for how much longer. He suggested he would lift the quarantine on interisland flights soon.

“Recession is an understatement,” council member Jack Suyderhoud, a retired economics professor, said during a discussion on the council predictions. “We’re in the business now of forecasting what viral science is doing and what the politicians are doing and it’s getting pretty crazy. In this environment, we’re guessing.”

Sen. Donovan Dela Cruz, chair of the Senate Ways and Means Committee, said during a press conference that lawmakers will work with Gov. David Ige’s administration to figure out where those cuts should come from.

Rep. Sylvia Luke, chair of the House Finance Committee, estimated the new budget hole to be about $300 million, but acknowledged that the amount could be greater.

Luke factored in about $600 million of federal relief funds that have not been spent yet. However, that money can’t be used on expenses previously budgeted by the state.

Figures provided by Dela Cruz’s office late Thursday show the shortfall closer to $431 million.

Dela Cruz said they’re still waiting to see what another round of relief funds from Congress may bring. The hope of many state officials across the country has been that Congress either provides some budget relief or allows states to use federal funds they already have to plug budget holes.

The Legislature also recently approved allowing Ige to seek federal loans. The one caveat, Dela Cruz said, is that the state can only borrow what it can pay back in three years.

Earlier, at its March meeting, the council had predicted flat growth in fiscal year 2021, meaning the state would have $300 million less to spend than previously budgeted. That prediction has since become far too rosy.

Between 2019 and 2020, the state is expected to lose more than $700 million in tax collections.

To put these numbers into perspective, in the recession in 2009 the state lost more than $440 million in tax revenues over the previous year, according to data on the Council on Revenues website

The council generally agreed that even the economic downturn of 2008 may not accurately predict what could happen to Hawaii after the pandemic.

“We can’t look at past historical figures of any kind of recession,” said Marilyn Niwao, a council member from Maui. “I haven’t seen this ever.”

The panel predicts the downturn could be temporary, with a spike in revenues following an economic rebound somewhere around 2022.

From 2023 through 2026, the council predicts modest tax growth of 3% each year.

“We’re in the business now of forecasting what viral science is doing and what the politicians are doing and it’s getting pretty crazy.” — Council on Revenues member Jack Suyderhoud 

Even if lawmakers plug the current budget hole, the state is still looking at a $1.6 billion deficit heading into 2022, according to budget figures provided by Dela Cruz. By law, Hawaii must have a balanced budget.

That deficit is based on the council’s prediction, which could still change drastically between now and January, when the Legislature will decide on the next two-year budget.

Luke also estimated that revenue projections for 2022 and beyond could be several percentage points higher than the council predicts.

The revenue prediction is the latest in the state’s financial woes. 

The tourism industry has ground to a halt since coronavirus cases spiked in March. And though state officials believe Hawaii has managed to flatten the number of daily new cases, restarting the tourism economy could still be months away.

Economists warned that without a plan to reopen tourism, jobs and the economy could take even longer to recover.

However, the local economy could start bouncing back. The state is following a reopening plan that sets out broad guidelines for how businesses and activities can resume. Ige on Wednesday agreed to proposals from the four county mayors on some reopening plans.  

In anticipation of the predicted downturn in tax collections, lawmakers reconvened briefly May 11 to plug up the looming budget hole by stashing away over $1 billion in the state’s rainy day fund, out of the reach of Ige’s administration. 

They’re taking another timeout until mid-June to decide how to spend that money.

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