A slowing state economy could mean lower than expected tax revenues for Honolulu's planned elevated commuter train.

Plunging visitor arrivals and slumping real estate and construction sectors are forcing the state to reduce tax collection forecasts and reduce spending. Honolulu city officials also are seeking to cut costs amid an economic downturn that's expected to continue well into, and quite possibly beyond, next year.

The slowdown is likely to have an impact on tax collections needed to build the elevated train from East Kapolei to Ala Moana. City officials hope to raise an inflation-adjusted $4 billion between 2007 and 2022 to pay for the 20-mile rail system. That, coupled with $925 million in anticipated federal funds, is expected to pay the $5 billion in capital costs associated with rail, according to the city's financial plan.

But that financial plan is based on tax-revenue forecasts generated in September 2006, when more robust economic growth was anticipated.

This year's declines in visitor arrivals mean lower than expected excise-tax collections and less money for rail, said Carl Bonham, executive director of the University of Hawai'i Economic Research Organization. Visitors account for 20 percent to 30 percent of the state's economic activity.

"We're shaving 600,000 or so visitors off the forecast (this year) and every one of those people would have stayed eight, nine, 10 days and spent hundreds of dollars every day, so the revenues forecast for the train are obviously going to come in low," Bonham said.

Signs of concern already have surfaced.

Through August, transit tax collections rose 32 percent to $109.6 million, versus $83 million in the same period a year ago, according to state Department of Taxation records. That excludes a 10 percent fee kept by the state to cover transit tax collection expenses.

However, July marked the first month that year-over-year transit tax collections were down. The city's portion of the transit tax dipped 32 percent to $11.4 million versus $16.8 million in July 2007. That trend continued in August, when year-over-year collections fell nearly 5 percent to $14.3 million.

CATCHING UP LATER

Project officials are monitoring the economic slowdown's impact on transit tax collections. Even with the slowdown, the city is still collecting much more than it's spending, said Mark Scheibe, deputy project manager for city transit consultant Parsons Brinckerhoff. That's because construction isn't scheduled to begin in earnest until late 2009.

In addition, the project's budget includes $1 billion to cover potential cost overruns, which could provide some budget leeway if tax revenues are lower than expected.

The city hopes that any near-term revenue shortfall could be offset by an economic rebound in future years.

"A couple of bad years in and of themselves wouldn't totally destroy the financial plan, if we catch up later," Scheibe said. "Obviously if it stays far below what we expected then that's much more of an issue."

However, "If we're looking at a long-term downturn in the economy, I think we could also expect it would start to show up on the cost side as well" by resulting in benefits such as greater labor availability and lower labor costs, Scheibe added.

The current economic climate is far different than what economists predicted in late 2006. Then, the cost of living in Hono-lulu had just spiked in response to surging housing and energy prices. Home prices were still rising, but sales activity was slowing. Hawai'i's visitor industry, which is the biggest sector of the economy, remained healthy, but was experiencing slower growth.

Today, Honolulu home prices are declining and visitor arrivals are down sharply. Job and income growth are expected to essentially remain flat or slightly down this year and next.

Hawai'i's sluggish economy has prompted the state Council on Revenues to make a series of cuts in its growth forecasts for future tax income. Those estimates are based in large part on lower-than-anticipated growth in excise tax collections. For example, in September 2006 the state Council on Revenues expected general excise and use tax collections would grow by 7.3 percent in fiscal 2008 and 9.4 percent in fiscal 2009. Actual excise tax collections in fiscal 2008, which ended June 30, rose just 2.5 percent. Estimated excise tax collections in the current 2009 fiscal year now are projected to rise by less than 1 percent.

Similarly, forecast growth rates for excise tax collections in the fiscal years 2010 through 2013 are now lower than they were in September 2006.

GAP IN ESTIMATES

The city's current publicly available financial plan for the transit system is based on 2006 Council on Revenues forecasts for fiscal 2007 through 2013. The city's forecast assumes that after 2013, Honolulu's excise tax base will grow at the historical average rate of about 4 percent. That's the rate of growth experienced from 1990 to 2005.

That means the city's transit tax estimates are likely too high in the early years, and too low in the later years, assuming the state does not experience a 1990s-style prolonged economic slowdown, said economist Bonham.

"The near term (economic outlook) could easily be much worse, then at some point there's going to be a rebound that's probably stronger than what we think now and will actually be stronger than what the steady-state trajectory was from a 2006 forecast," he said.

So far economists aren't predicting a repeat of the 1990s, when a drop in military employment and loss of tourism from Japan set the stage for a prolonged stagnant economy. Others aren't so sure.

"This is not just a matter of the local economy suffering from a depletion of Japanese investment in Hawai'i, but we're talking about the national economy," said Lowell Kalapa, president of the nonprofit Tax Foundation of Hawai'i. "With the dependence we have on the visitor market and the visitor market being more leisure than business, I would expect we're going to hurt more this time around than we did in the 1990s.

"It is going to have an impact on tax collections no matter how you look at it."

LONG-TERM BALANCE

The state began collecting a half-percentage-point general excise tax surcharge for transit in January 2007 and $246 million was raised in the first 20 months, according to the state tax department records. The state and the city of Honolulu are raising that money in the form of a 15-year increase in the state's general excise tax on O'ahu, from a maximum of 4.166 percent to 4.712 percent.

This year transit tax collections are expected to climb to about $178 million in 2007 dollars.

Last year, the transit tax was expected to generate $164 million in 2006 dollars. Adjusting for inflation, that's about $171.9 million in 2007 dollars. Actual transit tax collections last year were $136.4 million, about $35.5 million less than forecast. That disparity was partly because transit tax collections were low in the initial months after the surcharge took effect.

If transit tax collections don't meet expectations, the added burden would fall on local taxpayers. However, at this point the city does not anticipate having to deal with a shortfall.

Toru Hamayasu, chief of the city's transportation planning division, said the city will release an updated financial plan based on revised tax collection estimates in an upcoming draft environmental impact statement. That statement isn't scheduled for release until sometime next month at the earliest.

"At this point I can tell you ... (the updated financial plan) is still balanced or it shows a little bit of a positive cash flow at the end of the twenty-some years," Hamayasu said. "Otherwise we don't have a project."

Mayor Mufi Hannemann hopes to break ground on the rail project in 2009, with the first segment starting service between East Kapolei and Waipahu in 2012. The entire route to Ala Moana via Salt Lake would be in service in 2018.