Hawaii needs to build a lot more homes and tourists need to spend a lot more money to keep the economy growing in the coming years.

That was the message to lawmakers from some of the state’s top economists during a daylong briefing Tuesday at the Capitol.

With the Legislature set to convene Jan. 17, members of the House and Senate money committees, chaired by Rep. Sylvia Luke and Sen. Donovan Dela Cruz, called on Eugene Tian, the state economist; Carl Bonham of the University of Hawaii’s Economic Research Organization; Laurel Johnston, Gov. David Ige’s acting budget director; and others to paint them a picture of Hawaii’s financial future and discuss budget priorities.

“There are a lot of short-term ups, but it looks like we should be prepared for some long-term downs,” Dela Cruz said after the briefing. “There’s no doubt that if we don’t take some action the budget will be much, much tighter in future years.”

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Lawmakers, administration officials and economists are contemplating the effects of the new federal tax law and looming congressional action on social programs for the poor and elderly.

By some indicators, Hawaii’s economy is humming. The state had the nation’s lowest unemployment rate at just 2 percent in November, all counties are fully recovered from the recession, real estate is doing well, visitor arrivals are soaring and the value of building permits is slightly up, which suggests the construction industry may do better next year, Tian said.

But industries are not growing evenly, he said, noting that tourism continues to carry the weight by producing more jobs in retail, food services and accommodations while other sectors, like manufacturing and wholesale trade, have been losing jobs.

The state’s economic growth, projected at 1 percent or 2 percent next year, is also slower than the national average and higher inflation is expected. Meanwhile, collections from the state’s primary revenue source, the general excise tax, have been relatively flat.

Economists said Hawaii’s high cost of living, predominantly caused by housing prices that lead the nation, is spurring more people to move to the mainland, which translates into less tax revenue to provide government services.

Hawaii was one of just eight states that saw its population decline last fiscal year, which ended June 30. More people are moving to the islands from the Philippines and other countries than from the mainland, according to the latest U.S. Census.

Courtesy: DBEDT

“We don’t have room for an additional amount of significant growth unless people are going to start moving here to take those jobs,” Bonham said.

He estimated that if Hawaii built 33,000 more homes by 2025, it would increase the gross state product by 0.6 percent, employ 1 percent more people, create 13 percent more construction jobs and cause about 5,000 more people to move to Hawaii.

“We’re not making any dent in the housing backlog and we’re barely keeping up with population needs,” Bonham said.

While many in Hawaii would welcome the population leveling off, or even declining, that would create financial challenges in providing a wide range of government services, and those costs will continue to grow.

And Hawaii’s population is rapidly aging. Tian said the Aloha State is the eighth oldest in the country. That means a shrinking tax base, with more people on fixed incomes who are not paying taxes on their pensions, coinciding with a growing need for medical services.

Lawmakers agreed that housing should be a top priority next session and were open to new ideas from the economists on what types of housing may be needed.

“The economists hit the nail on the head, we need to do something on housing,” Luke said. “But if you look at the market, as far as affordable housing and luxury housing, it will sort itself out. What they’re saying is if you build more market and workforce housing, at some point in time they are going to turn into affordable housing or rentals because they are going to be more dilapidated.”

There’s no simple legislative fix to the housing shortage. But after the meeting Luke identified one area that legislators could focus on.

“The unfortunate takeaway in all of this is we need to have better communication between the state and the counties because a lot of the issues they’re addressing — whether it’s short-term vacation rentals, housing prices, permitting — it’s really a county zoning and land use issue,” she said.

Too Much Of A Good Thing?

While Hawaii’s tourism industry continues to drive the overall economy, there was concern about its future.

Visitor arrivals are expected to increase next year, setting yet another record. But the spending by tourists has started to flatten. In 2018, some 9.6 million visitors are expected to spend $17.6 billion, compared to 9.3 million visitors spending $17 billion in 2017, according to the Hawaii Tourism Authority and the Department of Business, Economic Development and Tourism.

“If they’re not spending more, it’s not going to trickle into the rest of the economy,” Bonham said.

Fielding questions from Republican Rep. Gene Ward and Democratic Sen. Glenn Wakai, Tian discussed the longstanding issue of Hawaii’s “carrying capacity” for tourists. Tian recalled discussions among experts in the 1990s about 9 million being the visitor capacity.

“We’re bringing in more frugal tourists,” Wakai said, noting the advent of timeshares and vacation rentals that have given visitors more affordable places to stay instead of hotels.

Tian said there is a declining market of Chinese visitors, who used to spend $400 a day.

Courtesy: HTA, BLS, UHERO

Bonham pointed out that Hawaii is seeing changes that are typical in an established destination and that’s it’s difficult to influence that mix.

“When you’re on your 20th trip to Hawaii, you don’t go to Sea Life Park anymore,” he said. “You’re here for the weather, and your spending habits are different.”

Bonham said the question of tourist carrying capacity is really up to voters.

“That limit is really more of a decision of our society, what the voters want to see,” he said.

There are already places in Hawaii where the amount of congestion on the roads is “astounding,” he said, noting concerns about what will happen if the visitor growth rate continues at its current pace.

“Some visitors will choose not to come,” Bonham said. “It’s either too expensive or too crowded, or the restrooms at the beach parks still haven’t been fixed.”

Looking ahead, economists and tax professionals are still analyzing the implications of the new federal tax law that President Trump signed last month.

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Tian and Bonham said to expect short-term benefits for most tax filers, but for it to be either a wash or result in tax increases for most people in the long term.

Bonham called it “the deficit enhancement act,” and questioned the wisdom of providing tax cuts at a time when the economy is strong and debt should be paid down.

In 2019, he said only 53,210 tax filers in Hawaii will see a tax increase. But he said in 2027, when most individual tax cuts expire, 195,600 filers will see a tax increase.

Marilyn Niwao, vice chair of the state Council on Revenues, noted the new law will reduce some of the federal tax deductions available to Hawaii residents.

She also said it will increase the incentive for individuals to establish and maintain their tax residences in lower-tax states.

The Council on Revenues, a group of economists and other experts, including Bonham, has yet to discuss the new tax law as a group. The council’s next quarterly meeting is Monday, when it will reconsider its forecast for the state general fund.

The council, at its last meeting in September, raised the forecast for growth in fiscal 2019, which starts July 1, to 4.3 percent. It lowered the forecast to 4 percent from 4.5 percent for fiscal years 2020 to 2024.

The Legislature relies on the growth forecast for the overall state budget. Ige has proposed only minor increases to the budget for next year, but lawmakers will almost certainly have their own priorities.

Join the conversation in-person at Civil Beat’s upcoming Civil Cafe event, “Legislative Preview 2018,” on Jan. 11 at noon at the Capitol. For more information, visit our events page.

See the reports from Tian and Bonham below. For more information, visit the briefing page here.