The state’s most powerful business interests appealed to state senators yesterday not to raise the general excise tax or temporarily suspend tax exemptions to balance the budget, while labor unions and social service providers said the tax options are preferable to more spending cuts to state programs.

The Senate Ways and Means Committee, looking for new revenue to match with the spending cuts in the Senate’s budget draft to close a projected $1.3 billion deficit over two years, heard an earful at a hearing on the tax options in the state Capitol auditorium.

Sen. David Ige (D, Aiea-Pearl City), the committee’s chairman, said senators will likely decide this morning how to proceed. He said senators want to make sure they have enough revenue-generating options available for conference committee negotiations with the House later this month.

A 1 percentage point increase in the general excise tax would raise about $500 million to $600 million a year. Senators would give back about $100 million in tax credits to protect poor and middle-income residents from the regressive, broad-based tax.

Temporarily suspending general excise tax exemptions on certain business activities and imposing a 4 percent GET on those activities would bring in about $200 million a year.

Gov. Neil Abercrombie and House leaders prefer suspending GET exemptions, but several senators want a GET increase.

The competing tax options have put some of the state’s top business interests in the sticky position of choosing, which some have sought to avoid. The Chamber of Commerce of Hawaii and the Hawaii Association of Realtors testified against a general excise tax increase, for example, but took no stand on suspending the GET exemptions.

“The preference would be to not have the increase and to take a hard look at the exemptions and to not take action on those exemptions that will increase the cost of doing business, that will impact employment within the state,” Jim Tollefson, the chamber’s president, told senators.

“So it’s a tough decision that you all have, and I respect you for it, but it’s a very difficult one for us, also.”

The general excise tax — the state’s largest source of revenue — has not been raised statewide since 1965. The tax has been praised by economists as efficient because of its broad application and relatively low 4 percent rate — 4.5 percent on Oahu because of a rail transit surcharge — but critics have complained about its pyramid effect and regressive nature.

Many of the general excise tax exemptions were provided to offset the pyramid effect on certain business activities, where the tax is applied at more than one point along a chain of related economic transactions.

Lowell Kalapa, president of the Tax Foundation of Hawaii, said both tax options would damage the economy. He has previously recommended that lawmakers move special fund revenue into the state’s general fund and scale back high technology and other tax credits to help with the deficit.

“At a very fragile time in our state’s economy, this is the worst thing you could possibly do,” Kalapa said.

Contractors, businesses that sublease property, airlines and stevedores could lose the most if the GET exemptions are suspended.

Glenn Nohara, of the General Contractors Association of Hawaii, said eliminating a subcontractor’s deduction could have a devastating effect on the construction industry and would eventually be passed on to consumers.

“The GCA believes that in a time when construction activity in the state has stagnated, leaving many construction workers unemployed, we should not be adding in costs that would further dampen construction,” he said.

Keoni Wagner, vice president of public affairs for Hawaiian Airlines, warned that losing GET exemptions — including for leasing aircraft and for aircraft service and maintenance — could force the local airline to reduce service, pull back on growth plans, lay off workers, or increase fares.

Kathleen Funk-Linton, a Realtor who also works as a partner in her husband’s commercial glass construction company, would likely feel the brunt of both tax options.

“I urge you and beg you, please don’t do this, because it is very important and we are on the edge as an industry,” she told senators.

But several labor and social service interests described senators as courageous for debating the tax options in a political climate in which anti-tax sentiment runs deep.

“No one wakes up and says, ‘I want a GET tax increase,’” said Alan Johnson, the chairman of the Hawaii Substance Abuse Coalition.

He said cuts to social service programs, such as drug treatment, can end up costing government more in the long run in higher health care and criminal justice costs.

The Democratic Party of Hawaii testified in support of a general excise tax increase because it will raise needed revenues for the budget while also providing net tax savings for many middle- and lower-income taxpayers through the tax credits.

The Hawaii Republican Party opposes new tax increases to balance the budget.

Nora Nomura, deputy director of the Hawaii Government Employees Association, the state’s largest public-sector labor union, said new tax revenue is necessary so the state can address unmet needs in social services and close the budget shortfall.

The Rev. Bob Nakata, a former state senator, said lawmakers have already made significant cuts to state programs during the recession. Nakata and others questioned whether critical programs in education, health, social services and housing could sustain further spending reductions.

“In many areas the state is running on a skeleton crew,” Nakata said. “Sure, nobody wants to pay increased taxes, but how do we take care of the needs of people?”