Hawaii tax collections soared to a record high in April while the local economy recovered

Parts of Hawaii’s economy are still recovering from 2019 before the coronavirus pandemic, but state tax revenue this year is on pace for more than a full rebound after setting a record in April.

Hawaii’s general fund took in $1.4 billion in tax revenue during April, representing a 40% gain over roughly $1 billion in the same month of 2021 and more than any month in history.

“By far the biggest tax collection month ever for the state of Hawaii,” Seth Colby, a tax research and planning officer with the state Department of Taxation, told the Hawaii Council on Revenues at a May 23 meeting. “We weren’t even in the same ballpark.”

General fund tax collections are mainly from personal and business income taxes, general excise taxes and transient accommodation taxes — all of which were higher in April and have been running strong since the beginning of this year.

During the first four months of the year, general fund tax revenue totaled $3.6 billion, up 45% from the same period in 2019 before the pandemic rocked Hawaii’s economy.

“We’re seeing some incredible revenues,” Kurt Kawafuchi, a former state tax director who chairs the Council on Revenues, said at the meeting.

The astounding tax revenue is one element leading state economists to predict that Hawaii’s ongoing broad economic recovery won’t slow this year despite high inflation and other challenges that have recently led to expectations for slower U.S. economic growth.

On Tuesday the state Department of Business, Economic Development and Tourism published a report that forecasts 3.2% inflation-adjusted growth for Hawaii’s economy this year, which is the same expectation it had in a March 1 forecast.

“Hawaii’s economic recovery continues on a healthy path,” DBEDT Director Mike McCartney said in a statement.

The steady outlook from the agency contrasts with an expectation in May from 50 top economic forecasting organizations that growth for the U.S. economy this year will soften to 2.6% from a 3.7% rate forecast in February.

For Hawaii’s economy, DBEDT cited stronger-­than-expected visitor arrivals so far this year, along with continued improvement in employment and a busy construction industry, as major drivers of sustained growth. The report also noted historic state tax collections.

Such positive factors should offset drags on the local economy that include inflation and a shortage of labor, according to the report.

DBEDT increased its expectation for total visitor arrivals this year to 9.1 million, up from its 8.9 million projection made in March.

The agency expects visitor arrivals in 2023 will reach 9.7 million, followed by 10.1 million in 2024 and 10.3 million in 2025, which would be just shy of the 10.4 million record in 2019.

During the first four months of this year, 2.8 million visitors came to Hawaii, representing an 83% recovery from the same period in 2019.

Nearly all of the recovery in tourism is from mainland visitors, who have been coming to Hawaii in higher numbers than before the pandemic. DBEDT expects a significant rebound in visitors from Japan will start in July.

In part due to inflation and higher hotel room rates, transient accommodation tax revenue hit an all-time monthly high in January at $82 million, according to DBEDT. TAT revenue in April was the second highest for any month in history, at $76 million. Before this year the record was $73 million in January 2020.

There is some concern that tourism arrivals could weaken because of Hawaii’s recent spike in reported and estimated COVID-19 cases.

The state’s seven-day average of new COVID-19 cases reported by health care providers has risen for nine consecutive weeks and was 1,098 as of May 25, according to the state Department of Health, which suggests the total for all new cases is around five times higher given that home test results aren’t reported to the state.

Local economist Paul Brewbaker recently said he expects the case surge could lead to a 25% drop in visitor arrivals in June and July from travel cancellations.

Eugene Tian, DBEDT’s chief economist, said the agency’s forecast does not anticipate such a drop. The report does note that case counts raise uncertainties about impacts on the economy and that visitors, residents and businesses will be cautious about activities even without government­-imposed restrictions.

A more certain drag on economic growth is inflation, which DBEDT expects will be 6% this year. Higher costs for goods and services are part of the reason why state tax collections are up so much, though economic growth is a bigger factor.

The agency’s projection for 3.2% economic growth this year adjusted for inflation is a little lower than the 3.5% growth forecast by the University of Hawaii Economic Research Organization in a May 12 report.

DBEDT expects Hawaii’s economy will continue growing over the next few years, though at a slower pace of 2.5% in 2023, 2.2% in 2024 and 2% in 2025.