In January, when state House and Senate Democrats were talking about their priorities for the session, new tax increases were discouraged.

With the economy in free fall and people losing their jobs, higher taxes could add another degree of pain. Democrats were also aware of the political fallout, since Republicans have tarred them as "tax-and-spend" liberals tone deaf to the economic pressures on Main Street.

But as majority Democrats pass the halfway point of this year's legislative session, and state revenues continue to decline, they are looking seriously at raising taxes to help close the state's budget deficit.

Gov. Linda Lingle, a Republican, has rejected new tax increases, creating a chasm with Democrats that has poisoned collaboration on the budget.

The state, based on this month's forecast of the state Council on Revenues, faces a $90 million deficit for the fiscal year that ends in June and a $170 million gap over the following two years.

The state House used a combination of spending cuts, state worker layoffs, special-fund diversions and tax increases to balance the two-year budget, but the draft does not reflect the latest forecast. The state Senate, which is just starting to review the budget, kept alive increases to the general-excise tax and the hotel-room tax as options.

For some of the lawmakers behind the tax proposals, the ideas are not simply to close the deficit, but to make the tax system more progressive or to help adequately fund public education and provide tax breaks for the poor and middle class.

State Rep. Marcus Oshiro, D-39th (Wahiawa), the chairman of the House Finance Committee, said he would prefer that the burden fall on the wealthy. "It would be on a very narrow band of taxpayers," he said.

Oshiro would increase income tax rates at higher-income thresholds: individuals who earn more than $125,000 a year; heads of households who earn $187,000; and couples filing jointly who make $250,000. The tax increases would bring in about $62 million a year in new revenue to help with the budget.

For example, according to state Department of Taxation estimates provided to Oshiro, an individual who makes $175,000 would pay an additional $375 in taxes. A head of household who earns $262,500 would pay an extra $563. A couple that makes $350,000 would pay $750 more in taxes. The tax bite would get larger the higher the income.

"These are not your middle-class, working families," Oshiro said. "These are the most fortunate ones in our community, who still are having high incomes."

SAKAMOTO'S PROPOSAL

The House bill, after two years, would also increase the standard income tax deduction and the personal exemption, which would provide a break for many taxpayers but would take $12 million annually away from the general fund.

State Sen. Norman Sakamoto, D-15th (Waimalu, Airport, Salt Lake), the chairman of the Senate Education and Housing Committee, said he would use a GET increase for public education and tax breaks that could help the poor and middle class.

"Although it's tax reform, people don't necessarily hear the tax reform part and just hear the raising taxes," he said. "In general, people would rather do other things than raising taxes."

Originally, Sakamoto wanted to increase the GET by 1 percent to generate $600 million in new revenue. He would have used about $200 million for public education and about $400 million for a variety of tax breaks for the poor and middle class.

But the existing version of the Senate bill does not specify the GET increase or the amount that would go to public education. It also presumes that a share of the money generated would go to the general fund to close the deficit.

The Senate bill would provide a GET exemption on groceries and medical services — taxes which have long been described as tough on the poor — along with a portion of rental housing payments. It also would increase the standard deduction and offer tax credits for people who volunteer at public schools.

"The public has repeatedly said they will pay more taxes for education. I add in, and I believe they are saying, 'as long as it's spent wisely,' " said Sakamoto, who acknowledged he would now likely have to share some of that money with the general fund. "So this bill tried to create a mechanism to spend it wisely.

"Bottom line — people are supportive of education — spend it wisely; the tax reform component — people on lower income, middle income — save money."

State House Speaker Calvin Say, D-20th (St. Louis Heights, Palolo Valley, Wilhelmina Rise), has frowned on an increase in the 4 percent GET and Senate leaders have described it as a last resort because of its broad application and regressive nature. People who live on or visit O'ahu are paying an additional 0.5 percent to help pay for Honolulu's rail-transit system.

Oshiro said House leaders may be more inclined to consider the Senate's suggested increase in hotel-room taxes. The House's budget draft already assumes the state would divert hotel-room taxes from the counties for six years to close the deficit, a politically unpopular stance.

Oshiro said raising hotel-room taxes may be less painful than a GET increase because it would mostly be paid by tourists.

But the Hawai'i Tourism Authority, the state Department of Business, Economic Development and Tourism, the Tax Foundation, and many in the tourism industry oppose a hotel-room tax increase. They argue it would put the state at a competitive disadvantage with other tourist destinations and leave tourists with less money to spend in the local economy.

DONATING A DAY'S WORK

State House Minority Leader Lynn Finnegan, R-32nd (Lower Pearlridge, 'Aiea, Halawa), said lawmakers should not be thinking about tax increases during a recession. She would rather that state workers donate one day of pay each month to help with the deficit.

"We hear from the people, and they're saying, 'We've already taken our hits. We've taken our blows,' " Finnegan said. "Businesses have closed. People have been laid off. People have had a 10 percent cut in pay, and those are the things we are trying to prevent."

State Rep. Jessica Wooley, D-47th (La'ie, Hau'ula, Punalu'u), who serves on the House Finance Committee, said Lingle herself was the first to propose tax increases this session with a six-year, $4 billion highway modernization plan released in January.

Lingle said that the state liquid fuel tax, the state vehicle registration fee, the state vehicle weight tax, and a rental car surcharge would not go up until the economy improves with 1 percent job growth for two straight quarters.

But when the taxes do go up, the administration estimated that average drivers would pay another $170 a year to help pay for highway improvements.

"The biggest tax increase I've seen is the governor's plan," Wooley said, pointing out that, unlike the House and Senate, Lingle's tax increases would not help balance the budget.

"The reality is she has one of the biggest tax increases that would hit people regressively."

Lingle, who plans to release her latest budget update on Wednesday, said last week she wanted to make clear to lawmakers as early as possible that she opposes tax increases.

Lingle had said earlier in the session that everything should be on the table in budget talks.

"It's become clear to me that any additional taxes on the people of Hawai'i would be devastating to the families who are trying to make it. It would put many businesses out of business — who report their income, as a small business does, it gets reported as personal income. And one of the proposals out of the House is a large increase in the income tax," she said. "So it would just be bad for the people of Hawai'i."

Several lawmakers have been disappointed by what they perceive as weaknesses in Lingle's budget updates and her backtracking on leaving all options open to close the deficit.

The governor said that she, too, has been peeved by some comments from lawmakers but said there is enough time remaining in the session for both sides to put bad feelings aside.

Lingle said she does not want the state to fall into the same trap as California, where Gov. Arnold Schwarzenegger, a Republican, and the state Legislature fought over the budget for months and lost public confidence.

"This is a time for everyone to say, 'Look, families are counting on us, the businesses are counting on us,' " she said. "This is our time."