In an alarming new projection that may limit the options for Hawaiʻi government, a panel of economic experts predicted Wednesday that the state will collect $550 million less in taxes over the next two years than lawmakers expected when they drafted the new state budget this spring.

The Hawaiʻi Council on Revenues said it expects state tax collections to decline by 3.5% in the fiscal year that begins July 1, then grow at an anemic rate of just 1% the following year. The council is tasked with estimating future tax collections, and those calculations become the basis for the state budget.

House Finance Committee Chair Chris Todd said Wednesday a decline in projected tax collections had been anticipated, and “this year’s budget provides some short-term flexibility and security.”

“Ultimately, it’s our job to do our best to navigate in these uncertain times and do everything we can to ensure our state is financially secure,” he said in a written statement. “There will be some difficult conversations ahead, but I’m confident the legislature and administration are up for the challenge in balancing the longterm stability of state government with looking after the needs of our residents, particularly those who need the most support.”

Lawmakers announced at the end of session earlier this month the new state budget will hold a cash balance of $700 million in reserve at the end of this budget cycle, with $200 million of that available to help offset any federal budget cuts that may be imposed.

Legislators had drafted the budget expecting to receive about $19.92 billion in state taxes over the two-year period but are now faced with the likelihood of only getting about $19.37 billion.

The Trump administration and Republicans in Congress have been debating possible cuts to Medicaid, to the Supplemental Nutrition Assistance Program and to federal rental subsidies for low-income families.

Hawaiʻi lawmakers say they want to use state funds to ease the impact of some of those cuts and are making plans for a special session later this year to do that. But their options will be limited if state tax collections slump.

The Hawaiʻi economy is not yet feeling any major impacts from federal budget cuts or the Trump administration’s tariffs, and tax collections have been holding up well so far this year. Total collections for the fiscal year ending June 30 are expected to top $9.9 billion, which would be an all-time record.

Members of the Council on Revenues pointed out Wednesday that much of the decline or slow growth in tax collections during the next two years can be attributed to the unprecedented state tax cuts the Legislature and Gov. Josh Green approved last year.

Those income and excise tax cuts are expected to reduce state tax collections by $630 million in the fiscal year that begins July 1, and more than $817 million the following year, according to the state Tax Department.

At the gloomy meeting of the Council on Revenues Wednesday, University of Hawaiʻi economist Carl Bonham noted the UH Economic Research Organization expects visitor arrivals, visitor spending and job counts to begin to slip later this year.

UHERO is also projecting a mild recession next year, citing sharp increases in U.S. tariffs, federal layoffs and “volatile fiscal and immigration policies.” All of that is undermining consumer confidence and making the business outlook worse, according to UHERO’s most recent forecast.

On the positive side of the ledger, Bonham noted the state’s so-called “rainy day” budget reserve fund holds more than $1.5 billion, money lawmakers could tap into if the situation deteriorates.

“There’s a lot more chaos to come, unfortunately,” Bonham said.