State House and Senate budget negotiators are close to an agreement on a state budget that would cut general-fund spending by about $800 million over two years and eliminate some state jobs.

The state spending and job cuts would be used in combination with federal stimulus money, state tax increases and a contraction in high-technology tax credits to close the state's budget deficit.

Lawmakers put most of the pieces of the budget together last night and are expected to agree on the details today. Lawmakers will also decide whether they need to temporarily scoop hotel-room tax revenues from the counties and divert money from the tobacco settlement fund and other special funds to make their financial plan balance.

Today is the deadline to have bills ready for final votes next week before the session adjourns, and lawmakers are expected to work until late in the evening to finish bills that have financial components.

State Sen. Donna Mercado Kim, D-14th (Halawa, Moanalua, Kamehameha Heights), one of the budget negotiators, said lawmakers tried to protect core health, public education and social services.

"I've not seen anything like this," the veteran lawmaker said of the deficit. "Having to balance, and having to cut, and having to deal with different groups that are so passionate about maintaining their programs."

The budget and tax plan that emerges from the session could be significantly revised when implemented by Gov. Linda Lingle. The state Council on Revenues is scheduled to update the state's revenue forecast in late May. If revenues again decline, that would leave the governor and lawmakers with a new gap to fill.

Policy differences between majority Democrats and the Republican governor could have a more substantial impact. Lingle has sought $278 million in labor savings in collective bargaining negotiations with public-worker unions, while lawmakers, citing the ongoing labor talks, did not account for any such cuts in their budget.

Lingle and labor unions are discussing possible furloughs — in the range of 16 to 24 days a year — and health-benefit adjustments to cut costs and avoid layoffs.

LINGLE MAY VETO

Lingle has also said she would veto tax increases, particularly an increase in income taxes on the affluent and in the hotel-room tax. House and Senate leaders are talking about extending the session by a few days, which would require the governor to act on the tax bills because they were approved within 10 days of the end of the session. If the session is not extended, the governor would have 45 days after the session to veto the tax bills and lawmakers would have to return in special session in July for overrides.

Unless lawmakers override her vetoes, the loss of the new revenue from tax increases would leave a sizable hole in the spending plan that Lingle would have address.

The governor has also indicated that she plans to use $157 million in federal stimulus money meant for public education — including $90 million this fiscal year — to close the deficit. Lawmakers want to use the federal money over the two-year budget to help offset state spending cuts in public education.

"The budget is built around fattening the general fund for the purposes of one special-interest group," said state Senate Minority Leader Fred Hemmings, R-25th (Kailua, Waimanalo, Hawai'i Kai). "This is nothing more than an attempt to have government labor unions walk away from collective bargaining without making one concession in these economic times of hardship."

The spending and job cuts would likely have been much deeper without federal stimulus money approved by President Obama and Congress.

Lawmakers and the governor had said earlier in the session not to expect the stimulus money to solve the state's budget problems, but the infusion of millions of federal dollars did spare the state from making more dramatic cuts to departments and programs.

UNCERTAIN OUTLOOK

If the state's economy does not improve before the federal stimulus money expires in 2011, lawmakers and the new governor could be left with more difficult choices.

Hemmings described relying on the federal stimulus money as a "foolhardy" approach that, because of federal restrictions on some of the money, potentially erodes states' rights.

The budget process also shows how difficult it is to eliminate state programs. Lawmakers agreed to restore some money to the only two programs Lingle recommended for elimination back in December: Healthy Start, a child-abuse prevention program; and adult dental services for lower-income patients.

Earlier yesterday, House and Senate negotiators agreed to tighten the high-technology investment tax credit known as Act 221. Lawmakers agreed to allow investors to use the credit to write off up to 80 percent of their state tax liability, rather than 100 percent now. Investors would also be limited to a one-to-one credit on their investment over five years, which would prevent a single investor from trading credits for equity in partnership with Mainland investors.

The adjustments to the credit could save the state about $120 million over the two-year budget, money that would go toward the deficit.

State Sen. Carol Fukunaga, D-11th (Makiki, Pawa'a), asked whether lawmakers were really trying to eliminate the investment tax credit, which expires at the end of 2010, and undermine the technology industry rather than save the state money. Some investors complain that limiting the credit to a one-to-one return could dry up Mainland investment in state technology projects.

State Rep. Pono Chong, D-49th (Maunawili, Olomana, Enchanted Lake), countered that the tax credit is still very generous to investors. "We're looking to try to find a way to address the shortfall," he said. "We don't think anyone wants to get rid of the technology industry."

State House Speaker Calvin Say, D-20th (St. Louis Heights, Palolo Valley, Wilhelmina Rise), said lawmakers tried to balance state spending and job cuts with tax increases and other revenue-generating ideas that were as selective as possible. He said lawmakers also left a cushion if revenues fall again in May.

"That's a huge chunk in right-sizing and downsizing government," the speaker said of the spending and job cuts.

The state's budget deficit has been a moving target. Viewed broadly, the rapid decline in state revenues over the past year due to the recession has left the state with about $2 billion less to spend.

Lingle imposed budget restrictions to get through this fiscal year while she and lawmakers drafted options for the upcoming two-year budget. The state Council on Revenues lowered its forecast in January and March, which left larger gaps for the governor and lawmakers to close. Based on the March forecast, Lingle needed an additional $90 million for this fiscal year, and the governor and lawmakers needed $170 million over the two-year budget.

Collaboration, which was always shaky, broke down after Lingle said publicly that tax increases and layoffs were off the table. The governor, however, has been talking privately with House and Senate leaders in recent days about budget and labor issues, so communication has not been cut off.

Most surprising, for the governor and lawmakers, was how fast state revenues collapsed. The state's budget surplus, which hit record status earlier this decade, was still healthy enough at the end of the past fiscal year in June to trigger the state constitutional requirement of a mandatory tax break. Lawmakers have agreed to a $1 income tax credit.