An improved economy and some tight management have fleshed out Hawai'i's state coffers, and some of the fat should be returned to the taxpayers, Gov. Linda Lingle said yesterday.

Lingle said the state was $486 million in the black at the end of June — $300 million more than any end-of-fiscal-year balance for the previous three years, and that she expects a surplus of at least $473 million when the fiscal year ends on June 30.

"We are in a very healthy fiscal position right now," she said.

Among the initiatives she is proposing, Lingle wants to increase the standard income tax deduction to $2,500 from the current $1,500 for individuals filing a tax return. Couples filing a joint return would be able to deduct $5,000 instead of the current $1,900.

The governor also wants to expand tax credits on food, medical services and nonprescription drugs.

Refundable tax credits to employers and families who purchase long-term-care insurance plans are also on Lingle's agenda. She would like to see a maximum credit of $1,000, or 50 percent of the premium cost.

"We should celebrate our success by granting significant tax relief to all tax payers in the state," she said, "with additional attention on relief for those who need it most."

Lingle also called on legislators to give tax breaks to businesses by lowering the amount employers are required to pay into the state's unemployment insurance fund, using a plan she says will save businesses in the state up to $196 million over the next three years.

Because of record low unemployment in the state, the unemployment fund has been collecting $125 million per year and paying out only $105 million, she said. The balance in the fund is projected to be $452 million at year's end.

House Speaker Calvin Say said he wasn't willing to commit to spending the surplus without exploring all avenues first.

"When your household budget is doing well after a long period of struggle, would you automatically go out and spend all your surplus money?" he said.

"We have always said that we are open to the governor's tax-cut proposals," said Say, D-20th (St. Louis Heights, Palolo, Wilhelmina Rise), "but we also want to consider the needs that require attention."

Those needs include a new prison, fixing problems at the Hawai'i Youth Correctional Facility in response to the Department of Justice investigation, public education, research at the University of Hawai'i, affordable housing and economic-development incentives, he said.

State Department of Education spokesman Greg Knudsen said he hopes that some of the budget windfall will go to the schools.

"There is a lot to be done," he said. "There has been a lot of corner-cutting in recent years. Studies show we're underfunded."

Lingle said her proposals for tax relief will not interfere with necessary expenditures.

"I agree that it is important for us to invest in our infrastructure," she said. "We need additional highways, we need to modernize our schools, we need funds for the University of Hawai'i. When it comes to prisons, we need to do more upkeep on those we have as well as add additional facilities.

"But I feel just as strongly that we need tax relief," she said. "We have the opportunity now, and we should take it."

Under the state constitution, tax rebates of some form will be mandated in 2007 because the general fund carryover balance will have exceeded 5 percent of state revenues for two years in a row.

Laura E. Thielen, executive director of the Affordable Housing and Homeless Alliance, said she wasn't familiar with the specifics of Lingle's proposals, but thought tax breaks for the state's poor residents could be helpful as long as they're weighed against basic services.

"For those having problems affording housing," she said, "tax cuts can be a good thing."

Reach Karen Blakeman at kblakeman@honoluluadvertiser.com and Sean Hao at shao@honoluluadvertiser.com.