Grassroot Institute testifies before Council on Revenues about state budget outlook

From Grassroot Institute

Dear Chair and Council members:     May 28, 2020

The Grassroot Institute of Hawaii would like to offer its comments on the Council on Revenues general fund revenue forecast.

Hawaii tourism might take years to recover, so the council must make sure it doesn’t offer any false hope to lawmakers about the status of the state budget.

According to a report by Tourism Economics,[1] Hawaii likely will take longer than other states to recover from the loss of tourism, primarily because Hawaii relies significantly more than other states on international travelers and visitors willing to travel long distances. Arrivals of these types of visitors are not expected to return as quickly to the levels before the coronavirus crisis as visitors willing to travel short distances to domestic destinations, according to the report.

The report estimates that the number of international visitors to Honolulu in 2020 will be almost 50% less than in 2019, and not fully recover to pre-coronavirus levels until 2025 — and that’s assuming that all travel restrictions will be gradually lifted this year.[2]

If Hawaii extends its 14-day quarantine or imposes testing requirements on visitors, this could lead to “a steeper decline in arrivals in 2020 and would likely delay the recovery,” according to Sarah-Jane Trimble, economist and lead author of the report.

Hawaii’s government so far has provided unclear direction on when the 14-day quarantine will be lifted, and whether tests or other requirements on travelers will be implemented when airports reopen. If Hawaii continues to put hurdles in front of travelers for years to come, this could delay the recovery and continue to depress state tax revenues, possibly creating a scenario similar to the one after the Great Recession of 2007-2008.

During the Great Recession, state general fund tax revenues grew by 2% in fiscal 2008, fell by 4.52% in fiscal 2009, fell by 3.12% in fiscal 2010 and grew by 5.46% in 2011. Thus, during that 4-year span, the average tax revenue growth was 0.04%.[3]

During the current situation, if state tax revenues fall by 20% in fiscal 2021, followed by the average tax revenue growth of 0.04%, which is what happened during the Great Recession, this will create an $11 billion deficit in Gov. David Ige’s budget by fiscal 2025.[4]

As the Grassroot Institute of Hawaii had long been urging, Hawaii lawmakers should have been saving during our economy’s boom years. Instead, they ignored the state spending cap and drained the budget surplus, leaving the state unprepared to deal with our current financial depression.[5]

Going forward, Hawaii lawmakers should scale back state spending and regulations so residents will not be overburdened while trying to get back to work. Our new report, “Road map to prosperity,” offers specific policy options that could help Hawaii “recover and even excel after the coronavirus lockdown.”[6]

Meanwhile, the Council on Revenues should not shy away from providing cautious estimates about how fast Hawaii’s economy might recover. Our lawmakers need the most realistic information they can get to make fiscally responsible decisions, and they are counting on the council to provide it.

Thank you for the opportunity to submit our testimony.

Sincerely,

Joe Kent
Executive vice president
Grassroot Institute of Hawaii
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[1] Sarah-Jane Trimble, et al., “COVID-19: pandemic impacts on North American city tourism,” Tourism Economics, May 7, 2020.

[2] In a May 26, 2020, email to the Grassroot Institute of Hawaii, Tourism Economics economist and lead author of the report Sarah-Jane Trimble wrote: “We do not currently assume that restrictions will last for the duration of the year, but we are closely monitoring the situation. Under a scenario where incoming travelers are subjected to 14-day quarantines for the rest of the year, we would envisage a steeper decline in arrivals in 2020 that would likely delay the recovery. The recovery is likely to be gradual and it will take time for airline capacity to rebuild due to the slump in travel demand. … If Hawaii is the only or one of few destinations that require incoming travelers to get tested prior to making their trip, this would likely have a dampening effect on the tourism recovery. At this moment it is difficult to say by how much such a policy will impact the recovery, as we have not seen this properly implemented yet or detailed guidance from governments as to how such a policy would work, e.g.: Will the same tests be used globally? Will the test be readily available for travelers?”

[3] “State of the State Budget 2020,” Grassroot Institute of Hawaii, March 2019, pp. 37-40.

[4] Hawaii state economists have estimated that tax revenues in fiscal 2021 will dip between 15% to 25%, so 20% is used as an average estimate. The -15% estimate was made by Eugene Tian, chief state economist, at a state Senate hearing on May 21, 2020 at 1:30 minutes. The -25% estimate was made by Carl Bonham, executive director of the Economic Research Organization at the University of Hawaii, at a state House hearing on March 30, 2020 at 10:30 minutes. The average growth in tax revenues from fiscal 2008 to fiscal 2011 was 0.04%.

[5] Keli’i Akina, “Hawaii needs a state spending cap with teeth,” Grassroot Institute of Hawaii, Feb. 4, 2020.

[6] “Road map to prosperity: How Hawaii can recover and even excel after the coronavirus lockdown,” Grassroot Institute of Hawaii, May 22, 2020.