The task of budgeting for the next two years got a bit more difficult for Gov. David Ige’s administration on Wednesday as the state Council on Revenues reduced its estimate of how much the state is likely to collect in taxes in the fiscal year that begins next July 1.
The pandemic and the abrupt tourism shutdown have cut deeply into state tax collections, leaving the state with a $2.3 billion budget shortfall for last year and this year. Ige has frozen hiring, restricted spending, and is planning budget cuts and other steps that may include public worker furloughs starting in November if there is no other way to pay the bills.
The administration is also planning to cancel $388 million in payments it was supposed to make to the Hawaii Employer-Union Health Benefits Trust Fund to cover the cost of future health care benefits for public workers and retirees, and is also planning to borrow $750 million from the federal government to help make ends meet.
Those drastic steps are designed to get state government through the immediate fiscal crisis until state tax collections can begin to bounce back next year. The Council on Revenues, a panel of experts tasked with projecting state tax collections in the years ahead, predicted in May that state tax collections would increase by 12% in the year that begins July 1.
Then came the bad news: On Wednesday the council decided in a 4-3 vote to pare back its projected increase in tax collections next year to 8.5% from 12%. That means tax collections for fiscal year 2022 are expected to total about $6.4 billion, or nearly $200 million less than the council projected in May.
The council’s tax collection projections are the basis of the state budget, and the adjustment made by the council means the Ige administration will have less to work with as it develops the state budget for the fiscal year that begins July 1.
Looking further ahead, the council unanimously approved projections for 6% growth in state tax collections in fiscal year 2023, and 4% growth in tax collections in fiscal 2024.
Those projections suggest total annual state tax collections may not reach $7 billion again until fiscal year 2024. By comparison, the state collected $7.1 billion in taxes in the year that ended June 30, 2019.
Ige did not immediately respond to a request for comment.
House Finance Chairwoman Sylvia Luke said the latest projection is cause for concern because it “signals that the economists and experts on the COR now believe that the economic recovery will take four years, as opposed to the prevailing thought (there will be) a quick recovery.”
Members of the council noted that the additional unemployment benefits and federal support for large and small businesses that was provided under the CARES Act is running out or has already dried up. That support bolstered Hawaii’s economy and tax collections, but it is unclear if Congress or President Trump will provide significant new federal support.
Council member Kristi Maynard, who is chief financial officer at Finance Factors Ltd., also questioned whether the public will be especially eager to travel when Hawaii finally relaxes its 14-day quarantine protocol for incoming trans-Pacific passengers.
“People are driving instead of flying, I mean, camping is way up,” she said. “I don’t know how soon that’s going to turn around.”
Carl Bonham, executive director of the University of Hawaii Economic Research Organization and a member of the council, told his colleagues he expects tax collections will bounce back more rapidly than the council projected on Wednesday.
Bonham said his own forecasting assumes the state’s tourism industry will reopen in mid-November with incoming air passenger counts of just 3,000 to 4,000 per day, which is about a tenth of the passenger counts before the pandemic.
He said his projections also assume the state can get control of the number of coronavirus infections locally, and anticipates a vaccine to prevent COVID-19 will be available in about late 2021.
In a separate action, the council also voted unanimously to project an 11% decline in tax collections for the current fiscal year that began July 1, which means overall state tax collections are expected to drop to about $5.9 billion this year.
As grim as that projection appears, it is actually a slightly more optimistic assessment than the council made in May. In its May projection, the council estimated that tax collections would drop by 12% in the current budget year.
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