To avoid a projected budget deficit, Gov. Neil Abercrombie and state lawmakers made the painful choice in 2011 to temporarily suspend general excise tax exemptions on nearly two dozen business activities.

The move was supposed to generate $173 million in fiscal year 2012 and $220 million in fiscal year 2013, the largest tax adjustment taken by the state during the recession.

But the state does not know how much money was actually generated. The state Department of Taxation, which had cautioned lawmakers that initial estimates were uncertain, puts the figures at $50 million for fiscal year 2012 and $70 million for fiscal year 2013.

Fortunately for the state, tax collections increased beyond expectations over the past two years as the economy improved.

Act 105, which expired with the fiscal year on Sunday, will go down as a lesson in the vagaries of tax policy.

"Unfortunately, it’s more of a guessing game than it ought to be," said Richard Kahle Jr., chairman of the state Council on Revenues.

Suspending the general excise tax exemptions came only after lawmakers had exhausted smaller tax and spending cut options during the recession. Lawmakers had raised income taxes on the wealthy, the hotel room tax and the conveyance tax on luxury real estate deals to bring in new revenue while reducing spending on state programs to help close deficits.

By 2011, with the state still projecting a $1.3 billion deficit, lawmakers turned to the general excise tax, which is imposed on most business transactions and is the largest source of state revenue. Rather than raise the broad-based tax, which business leaders had warned would stall economic recovery, lawmakers suspended nearly two dozen exemptions that had been awarded to businesses over the years.

The exemptions included a subcontractors’ deduction, a sublease deduction, the sale of liquor and tobacco to the federal government and the gross receipts from the rental or leasing of aircraft or aircraft engines used for interstate travel.

Some of the exemptions were meant to soften the pyramid effect of the 4 percent tax — 4.5 percent on Oahu because of a rail surcharge — particularly on business-to-business activity. Other tax breaks had been given to lure new businesses.

Abercrombie and House and Senate leaders withstood intense pressure from lobbyists for some of the state’s most powerful business interests and approved Act 105 as a temporary, two-year tax adjustment at the rate of 4 percent.

But by September 2011, just two months after the law took effect, the Department of Taxation dramatically downgraded the revenue estimates. The department told the Council on Revenues that because of great uncertainty, the department was more comfortable predicting $50 million for fiscal year 2012, not $173 million.

The startling downgrade was based on a lack of reliable data, the likelihood that businesses would adjust behavior to avoid or minimize tax liability, and a grandfather clause in the law. Businesses were exempt if they entered into binding written contracts before July 2011 that did not permit passing on increased tax rates.

Once the Council on Revenues adopted the $50 million estimate for fiscal year 2012, that figure was used in the formula to peg future revenue estimates, which led to a $70 million figure for fiscal year 2013.

The Department of Taxation does not know the full revenue impact of Act 105.

Fred Pablo, the department’s director, explained that the necessary changes to the tax forms and computer system that would have allowed the department to determine the impact would likely have taken close to two years to implement.

"Given that the suspension was intended to be temporary and the work on the forms and computer would have taken so long, the department did not move forward with modifications necessary to capture the data," he said in an email.

Pablo said the law suspended general excise tax exemptions only for certain types of business activities — not entire categories — so the department could not automatically identify and sort out the individual taxpayers who were affected.

Pablo said the figures the department provided to the Legislature before the law was passed were the "best estimate at the time, based on existing tax data and the scope and breadth of the proposed suspension involved."

Tim Lyons, a lobbyist and president of the Subcontractors Association of Hawaii, contends the tax adjustment likely was detrimental to the economy.

The largest single source of revenue from the law was expected to come from suspending the subcontractors’ deduction, one of the first exemptions awarded after the general excise tax was created in 1935. The exemption allows contractors to deduct the amount of money paid to subcontractors when calculating tax liability on construction projects.

Suspending the subcontractors’ deduction alone was projected to bring in $66.6 million in fiscal year 2012 and $68.6 million in fiscal year 2013.

Lyons suspects many contractors went directly to suppliers for building materials instead of using subcontractors for both materials and installation, which helped contractors but "just killed the subcontractors." He said other developers and contractors likely held back on projects.

Lyons maintains the law was a mistake.

"I think it was one of the worst things they ever did," he said of legislators.

Sen. David Ige (D, Pearl Harbor-Pearl City-Aiea), chairman of the Senate Ways and Means Committee, had suspected in 2011 that suspending the exemptions would result in limited revenues, and he now says "time has confirmed my belief."

But Ige also said the law was part of a strategy to avoid a general excise tax increase and other tax options to address the deficit, including a pension tax that Abercrombie had proposed.

"I feel that the effort to find alternatives to a general excise tax increase has resulted in a more fiscally conservative Legislature, one preferring to ‘live within its means’ by limiting spending rather than imposing a greater tax burden on residents," he said in an email. "This strategy also enabled the Legislature to reject a proposal to tax the pension incomes of residents."

Suspending the exemptions had been a more popular idea in the House.

Rep. Calvin Say (D, Pa­lolo-St. Louis Heights-Kaimuki), who was House speaker at the time, said Act 105 helped carry the state through the recession without raising the general excise tax.

Say said he would not have done anything differently.

"No, because If I had the choice between raising the general excise tax and looking at exemptions, I’d look at the exemptions once more," he said.