Hawaii's General Fund: A Stable, Yet Cautiously Optimistic, Financial Horizon
The economic forecast for Hawaii's general fund in the coming fiscal years paints a picture of stability, tempered by a healthy dose of caution. The recent meeting of the state's Council on Revenues (COR) revealed a stable, if not robust, outlook, providing essential guidance for legislators and the Governor's administration as they craft the state budget. While overall economic growth remains modest, the presence of significant one-time revenue boosts and ongoing external uncertainties necessitates a prudent approach to financial planning.
Navigating Revenue Streams: Estate Taxes and Economic Growth
The COR's latest forecast indicates a general fund growth rate forecast for Fiscal Year (FY) 2025 of 4.4%, a revision from the previous 5.0% projection. For FY 2026, the forecast has been lowered to -3.5% from -2.25%. Looking further out, projections for FY 2027 have been reduced to 1.0% from 2.9%, and for FY 2028 to 1.5% from 2.5%. Forecasts for FYs 2029, 2030, and 2031 remain unchanged at 2.6%, 1.9%, and 3.1%, respectively [hawaiipublicradio.org, files.hawaii.gov/tax]. These revisions, particularly the downward revision for FY 2025, reflect unexpected corporate refunds that were not factored into the March 2025 projection [files.hawaii.gov/tax].
A significant factor influencing the current forecast is an unusual surge in estate tax collections. Tax Research and Planning Officer Seth Colby noted that this increase is largely attributable to the death of one significantly wealthy individual, characterizing it as an "anomaly" that requires "dynamic and flexible thinking" in budget considerations [hawaiipublicradio.org]. While this infusion of cash is real and impacts the current year's budget, Colby advises against including it in broader macroeconomic outlooks.
Impact of Tax Relief Legislation
The COR's forecast also incorporates the revenue impacts of key tax relief legislation passed by the 2024 Legislature. Act 46, SLH 2024, incrementally decreases the State’s income tax burden over a seven-year period by increasing standard deduction amounts and expanding income tax brackets. The estimated revenue impact anticipates adjustments to withholding tables beginning January 1, 2025. This act is projected to cause a loss to the General Fund of approximately $240.3 million in FY 2025, escalating to $1.45 billion by FY 2031 [files.hawaii.gov/tax].
Additionally, Act 47, SLH 2024, reduces General Excise Tax (GET) collections by exempting medical and dental services rendered to beneficiaries of Medicare, Medicaid, and TRICARE. This exemption is set to apply to taxable years beginning January 1, 2026, with an estimated General Fund loss of $33.6 million in FY 2026, growing to $92.1 million by FY 2031 [files.hawaii.gov/tax]. These legislative adjustments underscore a strategic effort to provide fiscal relief to residents and businesses in Hawaii.
Economic Uncertainties and Federal Policy Influences
Beyond these internal factors, the COR acknowledges the considerable policy uncertainty that will influence collections over the next several fiscal years. Decisions made at the federal level concerning tariffs, tax laws, budget appropriations, workforce levels, and immigration are all expected to affect Hawaii's economy [files.hawaii.gov/tax]. Furthermore, there is a noted risk of a decline in international tourism due to ongoing foreign policy disputes, with Canadian tourists specifically mentioned as a potential concern [files.hawaii.gov/tax].
Carl Bonham, Executive Director of the University of Hawaiʻi Economic Research Organization (UHERO), pointed out that Hawaii's economy has not experienced significant growth overall, and considerable uncertainties surround the next presidential administration and subsequent federal economic policies [hawaiipublicradio.org]. This economic backdrop, coupled with the aforementioned tax relief measures, has led to significant decreases in the revenue forecast for the upcoming years.
Broader Economic Landscape and Sectoral Performance
Despite the uncertainties, several sectors are showing resilience and contributing to a cautiously optimistic outlook. The recovery of tourism on Maui following the 2023 fires, though gradual, is a positive sign. The slow but steady return of Japanese visitors, alongside a tight labor market and a strong construction outlook, helps to offset some of the broader economic concerns [files.hawaii.gov/tax].
The State Legislature, which is required to base its budget on the COR's projections, began its 2025 session facing these nuanced economic indicators [hawaiipublicradio.org]. The revised forecasts for the State General Fund tax revenues, detailed in a table encompassing FY 2025 through FY 2031, show fluctuating but generally modest growth rates. For instance, FY 2025 shows a 4.4% growth, followed by a projected -3.5% in FY 2026, and then a recovery to 1.0% in FY 2027 [files.hawaii.gov/tax].
Business Implications for Hawaii's Economy
The CO R's revenue forecast and the underlying economic conditions have direct implications for Hawaii's business community. A stable, albeit conservative, revenue forecast suggests that major shifts in state spending or taxation policy are unlikely in the immediate term, providing a degree of predictability for businesses.
However, the acknowledged "tremendous amount of policy uncertainty" stemming from federal actions means that businesses should remain agile. Fluctuations in federal funding or policy changes related to tariffs, trade, and economic stimulus could impact Hawaii's export-oriented economy and its diverse business sectors, from tourism to technology. Local entrepreneurs and investors should continue to monitor federal developments closely and consider diversification strategies where possible [files.hawaii.gov/tax].
The tax relief measures, such as the income tax adjustments from Act 46 and the GET exemptions from Act 47, present opportunities and challenges. While providing needed relief, businesses must also understand how these changes affect their tax liabilities and financial planning. The gradual reduction in tax burdens could stimulate consumer spending and business investment over the long term, but the immediate impact on state revenues necessitates careful management by the administration [files.hawaii.gov/tax].
Furthermore, the ongoing recovery of the tourism sector, particularly the return of Japanese visitors, is a positive indicator for businesses reliant on this industry. However, the projected flatness in overall visitor arrivals suggests that a focus on higher-spending visitor demographics and diversified tourism offerings may be crucial for sustained growth [hawaiip publicradio.org].
The mention of a tight labor market also signals continued challenges for businesses in attracting and retaining talent. Companies may need to focus on competitive compensation, benefits, and professional development to secure the workforce needed to capitalize on growth opportunities [hawaiipublicradio.org].
