These are the best of times when it comes to state tax collections, but Hawaii lawmakers are nonetheless considering an array of tax increases to help cope with long-term spending obligations such as pensions and health care for public employees.

Among the tax changes lawmakers are considering this year are increases in the state conveyance tax to provide money to develop affordable housing, and changes in the state tax code in connection with the federal Tax Cut & Jobs Act that could provide a financial windfall to the state.

Lawmakers also are considering a tax increase on real estate investment trusts, which own some of the most glamorous and pricey commercial properties in Hawaii, and have proposed a tax on the resort fees that hotels charge their guests separate from room rates.

Gov. David Ige’s administration and the Legislature are also continuing their years-long debates over the best way to collect taxes from vacation rentals and online sales, but those don’t quite qualify as tax increases. Vacation rental operators and Hawaii online buyers already owe taxes to the state, and the debate centers on how to get them to pay up.

Budget calculations

The potentially risky dalliance with tax increases during an election year is surprising given the state’s balance sheet.

The Hawaii economy is booming, and the Ige administration submitted a revised financial plan to lawmakers Feb. 28 that increased the projected general treasury surplus at the end of this fiscal year to more than $956 million. That is close to the all-time record surplus.

Meanwhile, taxes flowing into the state general fund through the end of February are running almost 7 percent ahead of last year’s collections. If that trend continues through the last quarter of the fiscal year that ends June 30, the state will haul in an additional $150 million even beyond what the Ige administration has projected.

But leaders in the House and Senate seem unimpressed — and alarmed. Ige’s revised financial plan proposes draining much of the accumulated surplus over the next four years by spending more in each of those years than the state will collect in taxes and other revenue.

The administration expects the deficit spending to end in 2023, when projected revenues will exceed the state’s anticipated expenses, according to the plan.

Senate Ways and Means Chairman Donovan Dela Cruz on Thursday announced the Senate had passed a package of tax increases and other steps he said will generate an extra $72 million next year to put state finances on more firm footing over the next few years.

“The additional revenues derived from the Senate bills will be added to the general fund, which will allow the state to pay for government services, debts and liabilities, and to reduce financial shortfalls for the next five years,” Dela Cruz, (D, Wahiawa-Whitmore-Mililani Mauka), said in a written statement.

Just in case his colleagues had any doubts about that plan, “I just want to have the members keep in mind that the state is overspending by $174 million this year, and $218 million next year, and $191 million in 2021,” Dela Cruz said in remarks to his colleagues on the Senate floor Thursday.

Hours later Dela Cruz amended those figures in a news release that warned the state is overspending by $208 million this fiscal year, $263.2 million in fiscal year 2020, and $209.7 million in fiscal year 2021.

Those abrupt adjustments in the calculations help illustrate the squishy business of predicting budget shortfalls years out. The Legislature still hasn’t decided how much taxing and spending it will authorize this year, and the administration hasn’t even proposed detailed budgets for fiscal years 2020 and 2021.

Vacation rental taxes

Apart from the deficit spending, Dela Cruz and House Finance Chairwoman Sylvia Luke also criticized the Ige administration for incorporating tens of millions of dollars in anticipated extra revenue from Airbnb-­type vacation rentals into the state financial plan for the years ahead. They warn the state may not be able to collect that money.

Lawmakers have been trying for years to find a way to collect excise and transient vacation rental taxes from people who rent out homes on platforms such as Airbnb, but haven’t yet found a solution. Ige vetoed a bill in 2016 that would have authorized Airbnb to collect taxes on behalf of the state.

Despite the uncertainty surrounding that issue, Dela Cruz said the administration incorporated into its financial plan an extra $33 million this year from Airbnb-type rentals, and $67 million next year. Luke said the transient vacation tax bills lawmakers are now considering, including Senate Bill 2963, wouldn’t raise nearly that amount of money.

Administration officials say they are continuing to work with lawmakers on ways to collect taxes on transient vacation rentals.

Cautious approach

When asked if the state needs to raise taxes at this time, state Director of Finance Laurel Johnston didn’t directly address the lawmakers’ array of tax increase proposals.

“Our current financial position is balanced, and we will continue to pay down the retirement and other post-employment benefits our state retirees have earned as required by state law,” Johnston said in a written statement. “Because of this, we need to be careful about how we spend discretionary funds and the Executive FY19 Supplemental Budget reflects this cautious approach.”

Luke and Dela Cruz also take issue with the Ige administration’s practice of balancing the budget through across-the-board restrictions on discretionary spending. Essentially, the administration has been instructing state departments to reduce nonessential spending by 5 percent or 10 percent in most cases.

Largely because of those restrictions, the administration lapsed $280 million back into the general treasury at the end of last fiscal year, Luke said. In effect, Ige withheld money that lawmakers had authorized the departments to spend, and rolled those savings over into the following year.

The concern is that “some of these departments cannot withstand” those restrictions, Luke said in an interview. For example, she said budget restrictions delayed the response by the Department of Land and Natural Resources to rapid ohia death, a disease that has been attacking ohia forests on Hawaii island.

“Restriction is not a good way to balance the budget,” said Luke, (D, Punchbowl-Pauoa-Nuuanu). “The right way to balance the budget is have a six-year plan knowing that there is no restrictions, because if you restrict 20 percent or 10 percent, it really handcuffs the departments from hiring and setting long-term goals.”

‘The silver tsunami’

Two important reasons that overall state spending keeps increasing — even after Ige imposed restrictions — are the escalating costs of health care for state workers and retirees, and required annual contributions for the public worker pension fund.

The health premiums the state must pay for active employees, together with contributions the state must make for future employee and retiree health benefits, will be more than $1.05 billion in the fiscal year that begins July 1, according to Johnston.

State and county contributions to the Employees Retirement System for public workers will be $1.06 billion in the year that begins July 1, according to data provided by Johnston.

Johnston told the Ways and Means Committee the growing obligations for the pension and health funds are part of “the silver tsunami.”

“People are retiring, the baby boomers are all retiring, and so this is what we’re now experiencing in government,” she said.

“Our revenues are not keeping pace with our obligations, and so that’s where we think we need to have some dialogue about this, because we are committed to paying these but we can only pay what we have in revenues, so we need to start having conversations about how to find those revenues.”

The idea of raising taxes when state coffers appear to be full doesn’t sit well with the state’s top elected Republican.

“With all of these extra sources being increased, why then are we always saying that we don’t have enough?” asked House Minority Leader Andria Tupola.

“This is absolutely not the right time” for tax increases, said Tupola, (R, Kalaeloa-Ko Olina-Maili). “I feel like when we have a surplus, which we supposedly are going be having at the end of this year, it’s a good time for us to start to figure out how we can put back money into the economy.”