Gov. Linda Lingle said yesterday the state should use $300 million from its budget surplus for tax relief, challenging state lawmakers to seize on Hawai'i's strong economy and reward people struggling with the state's high cost of living.

The governor said she would not release the details of her proposal until her State of the State speech in January, but hinted it could include an increase in the standard income tax deduction and expanding income tax brackets so fewer people would have to pay higher tax rates. Aides to the Republican governor have also told Democratic leaders it could include a one-time tax rebate.

Lingle has sought to raise the standard deduction since she became governor in 2002, while her mention of expanded brackets seemed to indicate she was reaching out to state Senate President Robert Bunda, D-22nd (North Shore, Wahiawa), who favors such an expansion.

Her proposal, made as she announced her supplemental budget request to the state Legislature, will likely mean tax relief will inspire much of the debate at the Capitol next session. State lawmakers had considered tax relief last session, after proposals from both Lingle and Bunda, but were hesitant about the long-term strength of the economy.

With projections for healthy revenue growth and a swelling surplus, lawmakers may see tax relief in a new light. Everyone is likely to act with one eye on November's election in which Lingle is running for re-election. Also up for election are all the seats in the state House and half in the Senate, with Democrats currently holding majorities in both chambers.

"The people of our state need this tax relief and they need it right now. It is the right thing to do and it's the right time to do it," Lingle said at a news conference.

For people on O'ahu, any state tax relief may be eaten by higher city property taxes and a planned general-excise tax increase in 2007 to help pay for a possible transit project.

Hoku Taroc, a legal assistant who lives in Palolo, said tax relief would be helpful at a time of high gas prices and rising property taxes. "Anything to relieve the taxpayers is always nice, but if they're taking it from a service to pay for tax cuts then I don't know if that is a good idea," Taroc said.

Lindy Facer, a senior sales associate at a financial firm, said she was shocked recently to find that her city property taxes went up $1,200 to a total of $3,600. She said the governor should help offset the cost of city taxes by cutting state taxes.

"Even if it is a wash, I can live with that," Facer said. "My property taxes went up and I need something else to make it a wash. But I'll take anything I can get quite frankly," said Facer, who lives in Kailua.

Richard Lacey, who works for an insurance firm, said he would only support a tax cut targeted to the lower and middle classes.

"As long as it doesn't cut into social services and not taking away from other programs, I guess it is OK," said Lacey, of Hawai'i Kai. "But it has to be equitable in some way. It can't all just go to the rich."

Lingle will ask the Legislature for $528 million in new spending next fiscal year, which would increase the state's budget to $9.6 billion. Spending using the general fund, over which the governor and lawmakers have the most control, would increase by $239 million, to $4.7 billion.

The governor also released a $926 million budget for capital improvement projects, with half of the money directed at upgrades to harbors, airports and highways. The proposal includes $63 million in bonds for an inline baggage system at Honolulu International Airport and $86 million in state and federal funds for the North-South Road from Kapolei Parkway to the H-1 freeway. It also has money for a new 'Ewa middle school and the development of a University of Hawai'i campus in West O'ahu.

Lingle's emphasis is on new spending for public education, health, human services and public safety. She also seemed cognizant of issues that have made news in recent months, requesting money to hire new teachers to work with students still learning English and $20 million to upgrade or build new housing for the homeless.

In one request she highlighted, the state would start to reduce the estimated 20,000 people who have no health insurance by gradually moving more people into Quest, the state's medical insurance program for the poor. Her administration hopes to add 2,500 people to Quest next year, and she also wants to restore preventive dental benefits through Quest for adults who now only get care in emergencies.

Yesterday's announcement was much more optimistic than when Lingle released her two-year budget proposal last December. At that time, the governor said much of the revenue growth would likely be absorbed by fixed costs such as debt service, pay raises for state workers and entitlement programs.

But state revenues have exceeded forecasts ever since, and are running 13.7 percent higher during the first five months of this fiscal year, a luxury after the state's economic downturn following the Sept. 11, 2001 attacks.

Lingle said the budget surplus allows the state to make new investments and still double its rainy day fund to $110 million. Tax relief, she said, would take up about half of the budget surplus.

Lawmakers will digest the governor's priorities and review their own proposals before drafting additions to the state's two-year budget by the end of the session.

Battle lines might be drawn over education, since the governor's request is substantially different from the state Board of Education's, especially over school repair and maintenance spending. Lawmakers may also stall Lingle's request to lift a cap on startup charter schools until the governor can defend whether existing charter schools are performing.

Tax relief, as it did last session, may cause some of the sharpest divisions. Aside from Bunda, who called for tax relief in his opening day speech last January, other lawmakers, particularly in the House, have been unwilling to publicly drive the issue or attempt to get consensus on what kind of tax cuts to offer. House Speaker Calvin Say, D-20th (St. Louis Heights, Palolo, Wilhelmina Rise), continues to say he is open to tax cuts but then usually shifts the subject to the state's unmet needs.

State Sen. Brian Taniguchi, D-10th (Manoa, McCully), chairman of the Senate Ways and Means Committee, said Lingle may be miscalculating by not releasing a more detailed tax relief plan before the session. "If she's going to wait until the State of the State to do it, she is going to lose a lot of important time," he said.

But, in a wider sense, lawmakers and Lingle have many of the same priorities. Lawmakers have said they will likely seek more money for affordable housing, repair and maintenance at public schools, and for emergency shelters.

Lawmakers on the finance committees have toured the Islands over the past several months and listened as people spoke of crumbling schools and overcrowded highways.

"I think what we heard was there were a lot of needs out there," said Rep. Dwight Takamine, D-1st (N. Hilo, Hamakua, N. Kohala), the chairman of the House Finance Committee. "Many of these are investments. Investments in our children, investments in our infrastructure."

Reach Derrick DePledge at ddepledge@honoluluadvertiser.com.