Gov. Linda Lingle gave lawmakers new recommendations yesterday to close a budget shortfall with money from the federal economic stimulus package, cuts to public-employee health benefits, diversion of tobacco tax revenue and further restrictions on a high-technology tax credit.

The governor urged lawmakers not to raise taxes and did not suggest any layoffs or furloughs of state workers to save money.

Lingle's recommendations would close a $650 million gap that opened after she released her two-year budget proposal in December. The state Council on Revenues lowered the state's revenue forecast in January, which pushed the governor's budget out of balance.

Lingle had initially said she would wait until after the council updates its revenue forecast next Thursday to provide new budget figures. But after complaints from state House and Senate leaders who wanted some guidance on the budget, the governor agreed to present her ideas sooner.

Lingle warned yesterday that the council's forecast next week could force additional budget adjustments.

"This plan recognizes the reality and it deals with it," she said at a news conference at the state Capitol. "These are not cuts or changes or adjustments or reductions we want to make, but those that we have to make to maintain our fiscal stability now and in the long term."

Lingle would close nearly half of the shortfall with $320 million in new federal Medicaid money from the stimulus package approved by Congress and President Obama. The money is meant to help offset state costs in Medicaid, the federal health program for the poor and disabled, as well as to absorb increases in state unemployment as a result of the economic downturn.

Some social-service providers believe this money should mostly be directed at the poor, but the Lingle administration and lawmakers have been counting on it as an important source of revenue to fight the broader budget deficit.

While the Medicaid money looks certain, Lingle's plan to save $96 million through adjustments to public-employee health benefits is less clear because it involves collective bargaining with labor unions. Trustees of the Employer-Union Health Benefit Trust Fund have already been warned that state workers' health premiums may have to rise by 29.4 percent unless costs are contained.

Lingle said her plan would affect current state workers, not retirees or their dependents, but did not provide further details.

Lingle also said the state could save $8.4 million by preventing the EUTF from providing group life insurance benefits if premiums are paid for by the state or counties. But a bill that would carry out that cut has been held by the House Labor Committee.

Randy Perreira, executive director of the Hawaii Government Employees Association, said public-sector unions are already looking at different health-plan options to try to save the state money.

"Any change to the premiums would have to be negotiated and, to date, the governor has not put forth any proposals to accomplish what she's suggesting in her financial plan," he said.

Perreira said union leaders appreciate that the governor has not called for state worker layoffs or furloughs but are apprehensive about what might happen after the council's next forecast.

"I think all of us say, 'That's great,' but we're going to wait to see next week what happens when it comes time for the Council on Revenues," he said.

POSSIBLE CASH SOURCES

Lingle also supported two House bills that would temporarily redirect portions of the tobacco settlement fund with tobacco companies and state tobacco tax revenues to the state's general fund to close the deficit. The settlement money would provide $14 million while the tax funds would generate $33 million.

Several interests that benefit from the tobacco-related money, including the University of Hawai'i and The Queen's Medical Center, have asked lawmakers not to divert the funds, which can be used for cancer research and prevention and trauma care.

Lingle also urged further restrictions to the Act 221 high-technology tax credits. The governor had suggested tightening the credits in her initial budget, and yesterday she said the state could save $43.9 million by limiting investors to a 50-cent return for every $1 invested rather than a full $1 return.

The governor also proposed several bookkeeping changes — moving up the general-excise tax filing date, removing exemptions on state assessments on some special funds, and transferring interest from some special funds to the general fund — to erase the shortfall.

State House and Senate leaders accepted Lingle's suggestions and said they would consider her ideas. The House is scheduled to finish its draft of the budget by the middle of the month, when it will be sent to the Senate for review.

DIVIDED OVER TAXES

A conflict, however, may be emerging over tax increases.

State House and Senate majority Democrats had downplayed tax increases as an option for the deficit at the start of the session. But, with the council's revenue forecast likely to drop, lawmakers are moving several bills that would raise taxes to help close the budget gap.

Lawmakers may choose to raise the general-excise tax — the state's main revenue source — and may explore higher hotel-room taxes and so-called "sin taxes" on alcohol and tobacco. Lawmakers would likely try to offset the impact of any general-excise tax increase on the poor, either through tax credits or exemptions.

The House also has a proposal to raise state income taxes on the wealthy while eventually increasing the standard deduction and personal exemption, which would provide a break for some taxpayers. The Senate may keep alive a bill that would transfer $150 million from a tax surcharge for a Honolulu rail project and, in exchange, repay the city through a bond sale. The city would also have the option of extending the surcharge for an additional two years to recover any lost revenue.

State Rep. Marcus Oshiro, D-39th (Wahiawa), the chairman of the House Finance Committee, said the public might object if lawmakers balance the budget entirely through state spending cuts that would likely be felt hardest in social services and public education.

"At some point, the community will say, 'Enough. We can't absorb any more cuts in services, our healthcare system is being affected, our schools are, the safety net,' " Oshiro said. "They'll come in and request that we raise taxes or find other sources of revenue to fill the gap."

State Sen. Donna Mercado Kim, D-14th (Halawa, Moanalua, Kamehameha Heights), the chairwoman of the Senate Ways and Means Committee, said she would prefer not to raise taxes. But she said lawmakers have to keep options alive in the event state revenues continue to fall.

"I don't want to have a tax increase. I'm not for it," Kim said. "But what happens at the end of the day if it's bad and there are no alternatives?

"As the Ways and Means chair, it's my responsibility to make sure that we have the vehicles. Personally, if I wasn't the Ways and Means chair, I'd vote against it."

Lingle, who had said earlier this session that every option should be on the table for discussion, drew the line yesterday on tax increases.

"If legislators are working on raising taxes on the community, I want them to know at the earliest possible time that I think that's a very bad idea," the Republican governor said. "I think it would hurt — dramatically — our economy for a much longer period of time by raising taxes at this point.

"We need to be doing everything we can to lift the burden off of individuals and off of the small-business community."