The state may bring in more tax revenue this year than it was initially expecting, but predictions for the future are still marked by uncertainty.
In March, the state Council on Revenues forecasted that tax collections this fiscal year would drop by 4.5%, in part because of a $315 million boost in collections from the last fiscal year. The council also initially anticipated tax revenue to grow by 2% for fiscal year 2027, which starts on July 1.
But in a meeting Thursday, the council voted to improve its 2026 forecast. Now it predicts that tax growth will drop by 2.5%. Part of that is because the ongoing Iran war is leading to rising gasoline prices — and higher taxes.
“The price surges that we're seeing in the very immediate term … I think those are going to add to our tax revenues because people are paying more for gasoline,” said University of Hawaiʻi Economic Research Organization Executive Director Carl Bonham at the COR meeting.
But that also applies to prices for other goods that are rising because of inflation.
“Higher prices that everybody's paying is resulting in more tax revenue in the very short run, before you start seeing demand destruction,” he said.
For next year, the council voted this week to drop tax revenue growth from 2% to 1% — predicting tax collections to be around $9.8 billion.
There were some positives for the economy.
The council noted that visitor spending, somewhat surprisingly, is up 6% in the first quarter of this year despite higher costs. This is at least partially because affluent individuals are still visiting Hawaiʻi and spending money.
“People in the upper parts of the income distribution aren't changing their behavior at all — they're just paying the higher costs,” Bonham said.
Reconstruction from the Kona low storms is also boosting the construction industry, which experts already believed was playing a big role in buoying the local economy despite growing costs.
“I think the 1% to me makes sense … I recognize there's all these shocks and there is, from a construction perspective, I know that there are concerns, but there's still a lot of projects that are being green-lighted,” said COR member Scott Hayashi. “So there's going to be, at least on the commercial side in large infrastructure projects, big things coming, which is going to prop up the construction industry.”
But it's unclear how the war will play out and continue to impact prices. Additionally, inflation, tariffs and the possibility that tourism spending might drop could all contribute to Hawaiʻi’s tax collections.
“It does certainly feel like the economy keeps chugging along. But we do have to keep in mind that the impacts from this energy price shock is really just now starting to bite,” Bonham said.
