Hawaii Projects Billion Dollar Budget Surpluses Despite Historic Tax Cut

Despite the extraordinary cost of the Maui wildfire disaster last year and the impact of the largest tax cut in state history this year, Gov. Josh Green’s administration anticipates billion-dollar budget surpluses for at least the next four years.

The administration also has projected that state general fund spending will somehow decrease in each of the next three years. Nothing like that has actually happened in at least the last decade.

A reduction in state government spending would be particularly surprising given that the public worker unions are bargaining with the state and counties for raises this year, and the price of almost everything else is going up. Honolulu is enduring one of the highest rates of inflation in the nation this year.

Those latest budget estimates are contained in a new draft multi-year general fund financial plan made public by the governor’s office at the request of Civil Beat. The report, which estimates state general fund revenue and spending for this year and the subsequent four years, is to be officially published later this month.

Cost Of Living Concerns

Skeptics have questioned whether the state can afford the ambitious tax cuts the Legislature approved this year given the pressing need for housing, mental health care and other government services.

But state Budget Director Luis Salaveria described the new financial plan as “very healthy.”

“The tax plan puts more money into the pockets of Hawaii families and will not require us to cut any government services,” Salaveria said in a written statement. “We have been able to invest in all of our key priority areas as a state and are expanding services for mental health, healthcare repayment program, homelessness, and affordable housing, in addition to passing historic tax legislation.”

“The Green Administration prioritizes the cost of living for Hawai’i families and this tax plan will increase disposable income and help with out migration, so that our residents can continue to afford to live here,” he said in the statement.

Salaveria sent the statement in response to a request for comment from Green’s office about the budget concerns.

Income taxes are the state’s second-largest source of tax revenue, yet the new financial plan developed by the Green administration predicts overall state tax collections will increase every year in spite of the unprecedented tax cut.

The new financial plan also forecasts general fund surpluses of more than $1 billion this year and at the end of each of the next three fiscal years, sizable cash balances by Hawaii standards. The financial plan projects even larger budget surpluses in the years that follow.

For all of that confidence, Salaveria has expressed doubts about the most recent tax collection predictions. In budget instructions distributed to state departments in September, Salaveria warned the impact from this year’s tax cuts may turn out to be greater than the experts expect.

‘Significant Risk Factors’

Salaveria wrote in his budget instructions that while the state Council on Revenues anticipates overall state tax collections will grow between 2.2% and 3.5% per year for the next three years, actual collections may be lower. The council is a panel of economists and other experts tasked with predicting state tax collections.

“While these tax relief measures will be beneficial to Hawaii’s residents, the estimated revenue loss from these measures is considerable; as such, there is a serious concern that the COR’s projections may be overly optimistic,” Salaveria wrote in his budget memo to state departments.

He also warned of “significant risk factors” that could hurt the state economy and thereby reduce tax collections in the years ahead, citing possibilities such as a national recession, international conflicts, labor shortages and reductions in federal spending.

This has all been surprising and worrisome to social services advocates such as Nicole Woo, director of research and economic policy for Hawaii Children’s Action Network.

Woo recalled lawmakers warned the public early in this year’s legislative session that little or no new money would be available for any social welfare initiatives or other programs because state funding was so urgently needed for the Maui wildfire recovery effort.

Then at the end of the session in May the House and Senate abruptly approved the largest state tax cut in Hawaii history, a move expected to reduce state funding by billions of dollars in the years ahead.

“That’s a huge cut to expected tax revenue. We have so many needs here in Hawaii, especially for our working families with children,” she said.

Woo said she is also troubled by administration projections that state spending will decline in the years ahead. “When you look at their future budget plans and think about inflation, these are real cuts, real significant cuts to spending. What are they going to cut? Are they going to cut schools? Roads?”

“They need to tell us how they’re going to achieve these savings without harming our communities,” she said.

The tax cuts approved by lawmakers this year are structured to increase the scope of the tax relief year by year, with the lost revenue to the state also increasing year by year. That means any potential impacts on state government operations or services may be delayed.

The state income tax cuts approved in Act 46 will begin to take effect on Jan. 1, and will reduce state income tax collections by more than $240 million in the fiscal year that ends June 30.

The impact of that tax cut along with an additional excise tax cut for medical services approved as Act 47 will accelerate in future years, with the state forgoing larger and larger chunks of revenue each year.

In fiscal year 2028 — which begins July 1, 2027 — the cuts are projected to reduce state tax revenue by $1 billion in that year alone. The annual loss in revenue will continue to increase after that.

Kalbert Young, who served as state budget director during Gov. Neil Abercrombie’s administration, said the public may not see any great impact from the tax cuts on state services and operations this fiscal year or next, but that may change in the years ahead.

“I would be willing to bet the impact in 2030 is going to be felt, and when we talk five years from now, people may not even remember or realize that it was for something that happened in 2024,” Young said during an online forum called “Crafting a People’s Budget.”

Those impacts may be felt by public employees who provide services to the public, and nonprofit organizations that receive grants from state government to provide social services to the public, Young said.

Weighing The Options

The Green administration has reason to move cautiously considering the dueling fiscal impacts of recovery expenses related to the Aug. 8, 2023, Maui fire and the tax cuts.

The administration is scheduled to present its proposed budget for the next two years to lawmakers by Dec. 16, which may help to clear up some of the confusion. But this does not appear to be shaping up as an easy budget year, and Green has said the new budget “could be tight.”

For one thing, there are substantial new costs ahead. For example, the administration’s new financial plan includes $800 million Green plans to commit over the next two fiscal years as the state’s contribution to a funding pool to settle claims related to the wildfire that destroyed much of Lahaina and killed at least 102 people.

There will also be costs associated with the ongoing contract negotiations with the public worker unions this year that are not included in the new financial plan.

Green has said he intends to eliminate budgeted vacant positions as a way to free up money for other uses. Salaveria has instructed state departments to submit plans to eliminate budgeted state government positions that have been vacant since July 1, 2020.

Those positions are “not functional” anyway, so services to the public will not be cut when funding is stripped from the vacant positions, Green has said.

But Young, the former state budget director, said eliminating vacant positions and their salaries is a complex undertaking that can affect services to the public.

State departments often use money budgeted for vacant positions to make emergency hires, to pay overtime or to hire people under temporary employment contracts, he said. Money from several vacancies is also sometimes also pooled to hire skilled workers at higher salary levels.

Green also said he plans to continue to pursue some version of his proposed fee on tourists to help finance Hawaii’s response to the impacts of climate change but said he does not need that fee to balance the budget.

“Hawaii’s Changing Economy” is supported by a grant from the Hawaii Community Foundation as part of its CHANGE Framework project.