Hawaii is likely to collect about $328 million less in revenue than previously anticipated during this fiscal year, the Council on Revenues said Tuesday. The change could affect legislative decisions on taxes as lawmakers decide what to prioritize.

The projection comes as the state has been predicting a budget surplus of about $2 billion this year, in part boosted by federal Covid relief funds with expiration dates.

At its January meeting, the council set the state’s general fund growth rate at 5.5% for the fiscal year that ends June 30. On Tuesday, the seven council members voted unanimously to lower that projected increase to 2%.

The chair of the Senate Ways and Means Committee said the lowered forecast could mean more of a focus on one-time expenditures like upgrading and maintaining infrastructure.

“It gives us less revenue to use when we craft the budget,” the committee chair, Sen. Donovan Dela Cruz, said in a telephone interview. “Unfortunately not everything is going to make it in.”

He cited priorities including infrastructure, housing and economic diversification in fields like film and agriculture.

‘Not As Rosy As How It First Started’

Certain departments – like the Department of Business, Economic Development and Tourism, as well as the Department of Education – have requested more money for their budgets than in previous years, said Dela Cruz.

They and other departments will have to figure out whether they have programs they can cut. “It’s not as rosy as how it first started,” he said. 

Gov. Josh Green introduced a large tax cut plan this year, an agenda that is subject to approval from the Legislature. On Tuesday, House and Senate lawmakers gave preliminary approval to an array of tax breaks as the legislative session nears its midpoint, but many details must still be resolved before any bills become law.

The Council on Revenues, which consists of tax experts and public accountants, convenes four times a year to discuss and update its revenue projections. The Legislature uses the council’s projections to write the state’s budget.

By the time of the council’s first meeting this year, in January, it was already clear that the economy wouldn’t be seeing the same kind of boom that it had experienced as pandemic-era restrictions eased.

Revenue collection data from January and February solidified that suspicion, explained council member Carl Bonham, executive director of the University of Hawaii Economic Research Organization.

Higher interest rates from the Federal Reserve also meant that fewer people are buying homes, which means less tax revenue from those transactions.

The council also lowered its projection of revenue collection for fiscal year 2024, from a 5% increase to a 4% increase.

This was due to both a potential recession next year, although Bonham said the consensus is it would likely be minor. The council also cited slowing inflation, which means that the cost of goods and the general excise taxes amassed from their trade won’t rise as sharply.

Recently, Hawaii’s actual tax collections have exceeded previous years’ forecasts.

A year ago, the council projected that the state would collect over $8.7 billion during fiscal year 2022. This would have meant a 15% increase in revenue from the year before, which had been impacted by the pandemic’s chilling of economic activity.

But the actual amount collected ended up representing closer to a 30% increase from the year before, as the state received a whopping $9.3 billion rather than the $7.2 billion that had been expected.

April had been especially notable, with tax revenue cresting $1.4 billion for that month as people filed their taxes and as a strong stock market boosted capital gains. But it would be hard to replicate that kind of growth year after year, according to the council.

“Even to hit $1.4 billion again would be extraordinary,” council Chair Kurt Kawafuchi said during the Zoom meeting.

The next council session is scheduled for May 15.