Democrats in the state Legislature have chosen to shift some of a $600 million budget surplus toward public schools, affordable housing and other badly needed infrastructure, which were their priorities at the start of the session in January. But their decisions late Friday to provide modest tax relief and to retreat from an unpopular price cap on gasoline were concessions to political reality.

Public schools would receive the largest share of the surplus. Lawmakers agreed to spend an extra $235 million for repair and maintenance — enough money, according to the state Department of Education, to seriously knock down a backlog of repair projects that has been an embarrassment for years.

Lawmakers also marked about $50 million for affordable housing, which has become one of the state's greatest challenges. That includes more money for rental housing and homeless shelters and renovations to public housing units that have been sitting vacant.

But Democrats waited until the last hour before Friday's midnight deadline to reach deals on tax relief and the gas cap, two issues that have the potential to influence elections this year.

Gov. Linda Lingle had called for nearly $300 million in tax relief in January and then last week recommended $120 million, a figure with a more realistic chance of approval by the Legislature. But Democrats had always planned on tax relief as an option only after their other priorities had been funded, and the $50 million they agreed to is directed mostly at the poor and middle class.

A much more complicated decision was to indefinitely suspend the gas cap and give Lingle, who has opposed the cap, the right to bring it back if prices soar higher. Several lawmakers privately believed the cap would work over time but the risk was too great if they left it in place and gas prices skyrocketed over the summer when they were out of session and campaigning for re-election.

"This is a political arena, my friend," said state Rep. Joe Souki, D-8th (Wailuku, Waiehu), who helped lead the revolt in the House against the gas cap.

The agreements on bills by House and Senate conferees set the stage for final votes this week before the session adjourns on Thursday. Democrats are expecting criticism from Lingle and Republicans for not converting more of the surplus into tax relief and could still be vulnerable if people blame them for higher gas prices by tinkering with market forces with the gas cap.

Even with such a large surplus, lawmakers on the finance committees wanted to be frugal, citing an unexpected $60 million in emergency spending for storm damage and the prudence of having a healthy reserve in case the state's economy slows down.

The new spending on school repair, affordable housing, tax relief and other initiatives combined with the reserve generally account for how lawmakers would spend the surplus.

"Well I think we're kind of concerned about, whenever you do tax relief, it's not just a one-year cost, it's a recurring cost," said state Sen. Brian Taniguchi, D-10th (Manoa, McCully), the chairman of the Senate Ways and Means Committee. "When we look at a six-year financial plan, it's a lot of money and we have to fit that all in."

Lingle, in a statement released yesterday, stressed collaboration. "We look forward to reviewing the final language of the bills once they are passed next week, including key measures such as our comprehensive energy self-sufficiency strategy to reduce Hawai'i's dependence on oil; long-overdue tax relief for our residents who most need assistance; funding to address homelessness and the shortage of affordable housing; providing the resources to enhance our emergency and natural disaster preparedness; stronger laws to protect our residents from crime; and stiffer penalties to protect pedestrians and deter underage drinking and drunk driving."

Other Republicans said the gas cap's suspension validates their prediction before the cap took effect in September that it would not work.

"The rescission of the gas cap is a huge victory for consumers," said state Senate Minority Leader Fred Hemmings, R-25th (Kailua, Waimanalo, Hawai'i Kai). "Now we can focus on making oil obsolete by diversifying our energy consumption with renewable and other alternative energy sources."

House and Senate Democratic leaders said yesterday they are comfortable with their choice to put infrastructure needs, particularly at public schools, ahead of tax relief and that they were right to suspend the gas cap after an eight-month experiment.

"We're committed to education," said state Senate President Robert Bunda, D-22nd (North Shore, Wahiawa). "It's always been said that you put your money where your mouth is and there is no question that's what the Legislature has done."

State House Majority Leader Marcus Oshiro, D-39th (Wahiawa), who had defended the gas cap against Lingle's criticism before the session, said Democrats listened to a majority within their caucus who wanted it to end.

Hawai'i is the only state in the nation with a price cap, although several states, and the federal government, are reviewing how to lower gas prices and deter what many claim is price gouging by oil companies earning record profits.

"My job is to be the advocate for the majority caucus," Oshiro said. "They heard from and they listened to their constituents and it was their collective desire to end the gas cap."

House and Senate leaders also reached agreement late Friday on spending $100 million over four years on an innovation fund to promote technology, along with a new effort to help the state collect taxes from people who purchase goods over the Internet.

The bills, along with tax relief and the gas cap, were turned back over to conferees after hours of private negotiating led by Bunda and state House Speaker Calvin Say, D-20th (St. Louis Heights, Palolo, Wilhelmina Rise), in Say's fourth-floor corner office at the state Capitol.

After considering several alternatives on tax relief that hovered between $20 million and $50 million, lawmakers finally agreed on a three-part package they believe would have the broadest reach on the poor and middle-class. Expanding income tax brackets by 20 percent, so many people would pay lower rates, would help about 80 percent of taxpayers and cost the state about $40 million. An increase in the standard income tax deduction to 40 percent of the federal level would help 53 percent of taxpayers and cost the state about $10.8 million.

A separate tax credit for people who had property damage during the 2004 Manoa flood or recent storms would cover 10 percent or up to $10,000 in losses not handled by insurance or other government aid. The state Department of Taxation estimates the credit would cost about $9.5 million.

Talks on the gas cap had nosedived into a bitter impasse by Friday afternoon and were revived by Bunda and Say after two House conferees, state Rep. Hermina Morita, D-14th (Kapa'a, Hanalei), and state Rep. Kirk Caldwell, D-24th (Manoa), were dismissed for clashing with state Sen. Ron Menor, D-17th (Mililani, Waipi'o).

"We pushed hard," said Caldwell, who favored a repeal.

Menor said Lingle would have the discretion to reinstate the cap if prices are high and, in an amendment to the law, would add Singapore to the three Mainland markets used to calculate the cap, which he believes would lower prices. Lawmakers also agreed to ask the state's Public Utilities Commission to increase monitoring of the oil industry to make price and profit information more transparent.

"It's really going to allow the public to judge for themselves whether or not the claims the oil companies have made were accurate," Menor said late Friday. "They've claimed that the reason why we have high prices is because of our pricing regulation and that if we didn't have a price cap in place that prices would be lower and more competitive.

"Well let's see if oil companies' claims are correct."

Reach Derrick DePledge at ddepledge@honoluluadvertiser.com.